Item 1.
Description of Business.
Item 2.
Description of Property.
Item 3.
Legal Proceedings.
Item 4.
Submission of Matters to a Vote of Security Holders.
Part II.
Item 5.
Market for Common Equity and Related Stockholder Matters.
Item 6.
Selected Financial and Other Data.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operation.
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A.
Controls and Procedures.
Part III.
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services.
Item 15.
Exhibits.
Signatures
Part I
Item 1. Description of Business.
The reporting entity in this 10-K is XFormity Technologies, Inc. (a Colorado Corporation) ("XFormity" or the "Company") and includes the operations of XFormity, Inc. (a Texas Corporation) (“XFM”), the wholly owned subsidiary of the Company. XFormity is a provider of comprehensive business solutions to multi-unit business operations. Specializing in the food-service industry, XFormity is providing analytical tools, which include operational reporting, balanced scorecards and benchmarking solutions, to restaurant owners and operators representing approximately 10,000 restaurants in North America. The Company's solutions assist customers manage the vast amounts of information necessary to run restaurants effectively.
XFormity's solutions help customers of all sizes convert raw data into meaningful information which in turn improves their decision making process and capabilities. By providing a complete line of tools, the Company provides customers with a single vendor that can deliver data integration, data storage, business intelligence, balanced scorecard and benchmarking capabilities that help decision makers able to see trends as they occur and provide value more rapidly. Pulling together information from anywhere helps provide a single window for better business insight.
The Company provides services for franchisors and franchisees in a growing list of customers across the United States and Canada. A few of the brands that the Company services include: Burger King, Taco Bell, Arby's, Domino's, Pizza Hut’s, KFC, Long John Silver's, Beautiful Brands, and many others. XFormity is proud to be the provider of Burger King Corporation's (BKC) operational reporting for all company owned and operated restaurants in the US and Canada. In addition to this deployment, the Company's success in delivering solutions on a big scale is demonstrated by the use its balanced scorecard and financial benchmarking tools for all Burger King Corporate restaurants in the United States and Canada, totalling nearly 6,500 restaurants.
XFormity's solutions are based on a software-as-a-service delivery model that provides benefits to both the Company and its customers as existing Information Technology (IT) investments become more valuable by utilizing XFormity's service based integration and reporting solutions. XFormity's solutions do not require customers to replace, upgrade or develop expensive extension to existing tools, which translates into a much quicker return on investment. The Company has developed highly effective processes for providing services for an increasing number of customers while keeping costs down and high levels of customer service.
The Company has had positive operating income for the years ended June 30, 2010 and 2009 but had incurred operating losses from its inception through June 30, 2008. The Company has addressed resulting liquidity issues through the sales of its software and professional services and the issuance of convertible debentures. The Company needs additional financing to fund its potential growth and there is no assurance that such financing will be available, if at all, at terms acceptable to the Company. If additional funds are raised by the issuance of equity securities, existing stockholders may experience dilution of their ownership interests and these securities may have rights senior to those of holders of the common stock. If the Company does need additional financing and adequate funds are not available or not available on acceptable terms, it could have a materially adverse effect on the Company's financial condition, results of operations and as a going concern.
XFormity's Competition
Competitors to the Company may be grouped in three broad categories (1) Point-of-Sale / Back-Office Providers: Many POS and back-office system providers have proprietary above-restaurant business intelligence tools. These are sold in conjunction with the main in-restaurant system only and do not offer alternative POS or system integration which significantly reduces the ability to offer a comprehensive view of the customer entire business; (2) Niche Reporting Providers: There exist several small companies that provide above-restaurant reporting services that compete with the Company. Such competitors market and sell their products in similar venues as the Company and have some success in several brands. The Company believes that its offerings are superior to these competitors and have proven to be able to displace these competitive products in many situations; and (3) Enterprise Reporting and Planning Solution Providers: Many of the big, enterprise level reporting solution providers are marketing their products to the large multi-national restaurant companies. Most of these competitors market their products and services on their technical merit and are not well versed in the day-to-day operations of multi-unit business operations. These competitive products are very expensive to license and to deploy.
.
XFormity's Marketing Strategy
XFormity's sales and marketing plan includes direct sales to franchisors and franchisees in the food service market. In addition to direct sales, the Company has several channel partners who are authorized resellers of the XFormity solutions.
XFormity's Intellectual Property
The Company protects its Intellectual Property through copyright and trademarks. As a hosted solution, the Company does not distribute software to users; authorized users are granted access to centrally managed solutions on an individual basis that is monitored by the Company’s personnel. Unauthorized access and piracy risks are greatly mitigated with this software deployment model. Under an agreement with b-50.com LLC, the company licenses b-50.com’s patent, although the Company does not utilize any of b-50’s technology.
It has registered its key Internet URLs, including XFormity.com, and reviews these registrations on a regular basis to ensure that they remain current and in good standing. Some of the limitations of Intellectual Property Protection are:
*
If and to the extent we apply for patent protection in the future, (of which there exists no current plan), no assurance can be given that any patent will be issued or that the scope of any patent protection will exclude competitors or that any patent, if issued, will be held valid if subsequently challenged. Except for our license of patent rights from b.50.com, we currently do not rely on any patent protection for our solution.
*
When the Company applies for registration of trademarks and registered domain names in an effort to protect them, it cannot be sure of the nature or extent of the protection afforded, since trademark registration does not assure any enforceable rights under many circumstances and there exists significant uncertainty surrounding legal protections of domain names.
*
There can be no assurance that any steps the Company takes in this regard will be adequate to deter misappropriation of our proprietary rights or independent third parties developing functionally equivalent products. Despite precautions, unauthorized parties may attempt to engineer, reverse engineer, or copy features and functions of the Company’s products.
*
Although management believes that the Company’s products do not infringe on the intellectual property rights of others, there can be no assurance that an infringement claim will not be asserted in the future. The prosecution or defence of any intellectual property litigation can be extremely expensive and would place a material burden upon the Company’s working capital as noted in the Company's financial statements and accompanying notes included herein with reference to the Company’s defence against b-50.com's patent infringement suit that has been settled.
XFormity's Revenue by Product Classification
The decrease in fiscal 2010 revenues over 2009 was primarily the reduction of billings for professional services offset by additional usage and related fees for our business intelligence software solution. Included in revenue, in accordance with current accounting guidance, were professional service contracts for the development of software programs that are recognized over the terms of the multi-year lives of the licenses billed to our customer. Payment under these contracts was received in fiscal years 2008 and 2007. The loss of major customers in either of these two product classifications may have a material adverse effect on our business, financial condition and results of operations. However, the Company continues to maintain strong business relationships with the customers utilizing these solutions.
XFormity's Research and Development
XFormity's research and development team continues to enhance the core technology behind its solutions for existing customers and for new customers. The Company's development team is extending its integration capabilities to incorporate a wider base of sources of data (point-of-sale systems, accounting systems, and other informational sources). Research and development costs including indirect and administrative costs in 2010 and 2009 were $492,330 and $541,856, respectively.
Government Regulations and Environmental Laws
We do not expect that existing or probable governmental regulations will have a material effect on the business. We did not incur any separately identifiable costs to comply with environmental laws.
XFormity's Employees
We currently have nine employees, including Chris Ball and Drew Seale, our Chief Executive Officer and Chief Technology Officer, located at our principal office in Dallas, Texas and one employee, Jack Rabin, our Chief Financial Officer, in Northbrook, Illinois. Mr. Kenneth Johnson, one of our directors, also serves as a sales and marketing consultant for the Company. For a description of the backgrounds of Messrs. Ball, Seal, Rabin and Johnson, see the section of this report entitled “Item 10. - Directors and Executive Officers.
Item 1A
Item 1A Risk Factors.
Not applicable.
Item 1B
Item 1B Unresolved Staff Comments
None
Item 2
Item 2 Description of Property.
The Company maintains its corporate headquarters in Dallas, Texas in office space consisting of approximately 3,200 square feet, which we lease under a “triple net” lease that requires us to pay an average of $4,329 per month and our pro rata share of real estate taxes and common area costs over a 64 month term effective June 1, 2008. The Company also leases office space on a month-to-month basis in Northbrook, Illinois. The rent is $650 per month. The Company does not own any real estate.
The Company believes that its facilities are suitable for the business of the Company as presently conducted and for necessary growth in personnel and customers. The facilities are adequately insured.
Item 3
Item 3 Legal Proceedings.
As of the date of this report, there are no pending legal proceedings in which we or any of our officers, directors or affiliates is a party, and we are not aware of any threatened legal proceedings. See Note 9 re Convertible Debentures.
Item 4
Item 4 Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the three months ended June 30, 2010
Part II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The Company's stock trades on the OTC Electronic Bulletin Board under the symbol "XFMY".
The following table sets forth the high and low prices for the Company’s common stock for each quarter commencing July 1, 2008. The prices presented below are bid and ask prices, which represented prices between broker-dealers and does not include retail mark-ups and markdowns or any commission to the broker. The prices do not necessarily reflect actual transactions.
On October 12, 2010, the bid and ask prices of the Company’s common stock as quoted on the Bulletin Board were $0.03 and $0.07, respectively. In addition, the Company’s common stock is subject to rules adopted by the Securities and Exchange Commission ("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 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 the investor is working with 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.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the Company’s common stock. Many brokers may be unwilling to engage in transactions in the Company’s common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares.
Holders
As of October 12, 2010, the Company had 138 stockholders of record. This does not include stockholders who held stock in accounts at broker-dealers.
Dividends
The Company has not declared or paid any cash dividends on its capital stock since inception and does not expect to pay any cash dividends for the foreseeable future. Management currently intends to retain future earnings, if any, to finance the expansion of the Company’s business.
Securities Authorized for Issuance under Equity Compensation Plans
The options granted under the Equity Compensation plan have a seven year life and total option grants available under the plan are limited to 20 percent of the issued and outstanding stock of the Company. Of the above grants, 6,775,000 were approved and issued in 2007 to the then current employees, directors and one outside vendor and on August 12, 2009, 250,000 were approved and issued to one new director in the current fiscal year. There were no issuances of stock options to any officers, directors or employees in the fiscal year ended June 30, 2009. It is expected that the compensation of the executives in fiscal 2011, including equity awards, will be reviewed based on the expected performance of the Company as established by the Compensation Committee of the Board of Directors.
Description of Securities
Preferred Stock
The Company has authorized 100,000,000 shares of preferred stock, par value $0.01, none of which has been issued.
Common Stock
The Company has authorized 125,000,000 shares of common stock, par value $0.0001 of which 51,931,553 were issued and outstanding as of June 30, 2010.
Unregistered Sales of Equity Securities
The information relating to the sales of the Company’s Convertible Debentures should be read in conjunction with the consolidated financial statements and accompanying notes thereto in Note 9, the Consolidated Financial Statements, of this report.
The debentures, which were taken for investment purposes and subject to appropriate restrictions on transfer, were sold exclusively to persons who qualified as “accredited investors” within the meaning of Rule 501(a) under Regulation D, without registration under the Securities Act of 1933, as amended, (the “Securities Act”) in reliance upon the exemption contained in Section 4(2) of the Securities Act and Regulation D, Rule 506 thereunder.
Item 6.
Item 6. Selected Financial and Other Data.
Not Applicable
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion of the Company’s financial condition and results of operation should be read in conjunction with the consolidated financial statements and accompanying notes thereto in Item 8 of this report.
Critical Accounting Policies and Procedures
The Company believes its critical accounting policies (see Note 1 to the consolidated financial statements) are revenue recognition, software development costs, accounting for research and development expenses, accounting for convertible securities with beneficial conversion features and share based payments under accounting principles generally accepted in the United States and that they are adhered to in the accompanying consolidated financial statements.
Revenue Recognition
The Company’s primary revenue is derived by delivering software as a service, or hosted solutions for its clients. Revenue derived from the sale of these services is billed monthly or quarterly and is recognized in accordance with current accounting guidance over the term of the agreement. The Company bills for its service in advance; payments from customers received in advance of the month of usage are reflected as deferred revenue until the month of usage, when they are recognized as earned revenue. In addition to the software license revenue the company derives revenue from professional services fees associated with custom software development, project management and other related services it provides to customers.
Software Development Costs
The Company capitalizes internally generated software development costs in accordance with current accounting guidance. Capitalization of software development costs begins when a product's technological feasibility is established. Costs incurred for research and development of products where technological feasibility has not yet been established are expensed as incurred. Costs eligible for capitalization have been immaterial for the periods presented.
Receivables
Receivables consist of amounts due to the Company from normal business activities generated from contracts with its clients for the use of its software. Customers are invoiced in the month preceding the use of the service. Many of the Company's customers remit payment for the subsequent month's services during the month billed for the use of the software. The collected funds are recognized as deferred revenue in the Company's financial statements until the actual month of service at which time they are classified as revenue. Accounts receivable thus include only funds due from customers who have not paid for the monthly service provided.
Insurance
The Company carries Directors and Officers Liability insurance, comprehensive liability insurance on its assets both at its main offices and at the data hosting service center and mandatory worker compensation on its employees.
Results of Operations - Fiscal Year Ended June 30, 2010 compared to Fiscal Year Ended June 30, 2009
Revenues: The Company’s primary revenues are derived by delivering software as a service, or hosted solutions for its clients billed on a monthly basis for each location serviced or from solutions developed at specific customer’s requests. Customers are billed on a monthly basis for each location serviced or at a project’s completion. For the year ended June 30, 2010, the Company generated $1,925,928 in revenues compared to $1,978,231 in the prior year. This decrease in revenues is primarily attributable to the reduction of billings for professional services in the amount of $174,021 offset by additional new customers and related fees for our business intelligence software solution of $121,718.
In 2008 and 2007, the Company had received payments under contracts for the development of two of its solutions, subject to a multi-year licensing agreement, that is recognized under the current accounting guidance over the term of the licensing fee agreement. The Company recognized $84,000 in both 2010 and 2009, respectively, under the terms of these multi-year licensing agreements. As of June 30, 2010, the Company has $44,000 still to be recognized from the development fees in deferred revenues on its balance sheet.
Cost of Revenues: The costs for the year ended June 30, 2010 were $638,225 compared to $561,531 in the prior year. The increase was primarily attributable to costs for personnel and related payroll costs in the amount of $91,002 due to increased salary rates and a greater allocation of time from existing personnel to this category and license fees that were attributable to our increased revenues under our license agreements in the amount of $305. These increases were offset by the reduction of our data hosting center and telecommunication expenses in the amount of $13,517 and other operational costs by approximately $1,096 as management continues to maximize its operating efficiencies.
Research and Development: Research and development costs are charged to operations as incurred and consist primarily of personnel, related benefit costs and outside contracted services. The costs for the year ended June 30, 2010 of $492,330 compared to $541,856 in the prior year. The decrease was attributable to reduced personnel, and related payroll costs due to a reallocation of time from existing personnel to operations by $18,409 and decreased use of outside contractors in the amount of $20,525. Other costs decreased by $10,592. The Company’s research and development is part of its strategic plan to provide enhancements to its existing software and integration into new operations currently in the hospitality market.
Marketing and Selling: The costs for the year ended June 30, 2010 were $275,980 compared to $339,434 in the prior year. The Company’s marketing and selling expenses in the current year decreased due to re-allocated personnel time from marketing and sales to operations by $20,424 and reduced costs for advertising, travel and trade shows in the amount of $43,030. For the current fiscal year, the Company continues to expand its customer base through direct sales, trade shows and referrals from its relationship with existing clients.
General and Administrative: The Company’s general and administrative costs consist primarily of executive salaries and related benefits, professional fees for attorneys, our independent auditor, rent, expenses related to being a public company and other administrative costs. The costs for the year ended June 30, 2010 were $412,482 compared to $430,924 in the comparable period of the prior year. On August 12, 2009, the Company authorized the issuance of 250,000 stock option grants to its latest Board of Directors member and recorded non-cash compensation expense of $17,673 resulting from that option grant. The options to purchase the Company’s shares were granted at the closing price on the date of the grant at $0.08, using the Black Sholes method for calculating the charge and vested immediately upon the grant. In the current year, payroll and related costs decreased by $210 excluding the non-cash compensation expense. The Company affected further decreases in professional fees, occupancy expenses, insurance and all other administrative expenses of $35,905.
Interest Expense: Interest expense consists of the following:
Actual cash paid for interest during the fiscal years ended June 30, 2010 and 2009 was $47,547 and $50,081, respectively.
Net Income: The Company concluded its second consecutive profitable year as net income for the year ended June 30, 2010 was $485,411 compared to $786,508 in 2009. The decrease in the net income was primarily the results of the following: reduced gain on debt reduction of $65,000 vs. $763,769 in the prior year offset by the increase in the change of fair value of derivatives of $408,921, decreased revenue from professional service fees offset by an increase of the licensing of the Company’s solutions to additional customers in the amount of $52,303 and a reduction in operating expenses of $54,728. Income from operations increased 2.3% totalling $2,425, including a non-cash compensation expense of $17,673 resulting from an option grant to the newest member of its Board of Directors.
Liquidity and Capital Resources
General
The Company believes it will continue its profitable operating results in 2011. While the Company continues developing a significant pipeline of business opportunities that include multi-unit, full service and casual dining restaurants within the hospitality industry and did achieve the opportunities identified in last year’s pipeline, there can be no assurances that this year’s results will be indicative of future results.
In October 2008, the Company entered into an agreement with its patent counsel to settle its obligation for their professional services that included an issuance of one million shares of XFMY’s common stock, cash payments that extend over 48 months and additional debt reduction payments upon the Company achieving certain revenue targets. In the two years, the Company did not achieve any of the initial targets and thus has reduced the maximum payout value to $610,000 in full settlement of the Company’s obligation of approximately $1,579,000. Although the Company had a positive cash flow in the current year, it was primarily due to its discontinuation of any further payments under this agreement after September 30, 2009. To date, the Company has paid a total of $120,000 against this obligation and is currently in further discussions with the law firm. The Company expects to favourably resolve this matter by the end of the current calendar year. As of June 30 2010, there was an accumulated deficit of $9,021,513 and the Company’s cash position was $76,952.
The Company may need additional financing and there is no assurance that such financing will be available, if at all, at terms acceptable to the Company. If additional funds are raised by the issuance of debt or equity securities, stockholders may experience dilution of their ownership interest and these securities may have rights senior to those of holders of the common stock. If adequate funds are not available or not available on acceptable terms, it could have a material adverse effect on the Company’s financial condition and results of operation.
Finance
The Company continues to review capitalization alternatives, including various debt and equity instruments. The Company may need to raise between $1,500,000 and $5,000,000 in new capital over the next 12 months. The use of funds includes operating capital for general corporate purposes, expansion of the sales, marketing and software development staff, equipment and a strengthened balance sheet. If additional funds are raised by the issuance of debt or equity securities, stockholders may experience dilution of their ownership interest and these securities may have rights senior to those of holders of the common stock. As of the date of this Report, there are no agreements, commitments or arrangements for any future financing, and no assurance can be given that future financing can be achieved.
Legal Issues
There are no material legal proceedings that management is aware of that affect the Company.
Convertible Debentures
Under the revised term sheet, the Company may still issue an additional $676,865 of its 9% convertible debentures to accredited investors to be used as working capital. See the provisions of these debentures in Note 9 of the Consolidated Financial Statement.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Tabular Disclosure of Contractual Obligations
Payments due by period
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8.
Item 8. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and stockholders of XFormity Technologies, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of XFormity Technologies, Inc. and Subsidiary as of June 30, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 XFormity Technologies, Inc. as of June 30, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 20 to the consolidated financial statements, the company has a net stockholders’ deficit and may require additional financing to continue in operation. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 20. The consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty.
As discussed in Note 22 to the financial statements, the Company has restated the unaudited information for the three quarterly periods in the year ended June 30, 2010 to correct errors in its accounting of the derivative liability.
/s/ M&K CPAs, PLLC
Houston, Texas
October 11, 2010
XFormity Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Deficit
Years Ended June 30, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2010
Note 1 - Organization, Nature of Business and Significant Accounting Policies
Organization and Nature of Business
XFormity is a provider of comprehensive business solutions to multi-unit business operations. Specializing in the food-service industry, XFormity is providing analytical tools, which include operational reporting, balanced scorecards and benchmarking solutions, to restaurant owners and operators representing approximately 10,000 restaurants in North America. The Company's solutions assist customers manage the vast amounts of information necessary to run restaurants effectively.
XFormity's solutions help customers of all sizes convert raw data into meaningful information which in turn improves their decision making process and capabilities. By providing a complete line of tools, the Company provides customers with a single vendor that can deliver data integration, data storage, business intelligence, balanced scorecard and benchmarking capabilities that help decision makers able to see trends as they occur and provide value more rapidly. Pulling together information from anywhere helps provide a single window for better business insight.
The Company provides services for franchisors and franchisees in a growing list of customers across the United States and Canada. A few of the brands that the Company services include: Burger King, Taco Bell, Arby's, Domino's Pizza Huts, KFC, Cosi's, Long John Silver's, Beautiful Brands, and many others. XFormity is proud to be the provider of Burger King Corporation's (BKC) operational reporting for all company owned and operated restaurants in the US and Canada. In addition to this deployment, the Company's success in delivering solutions on a big scale is demonstrated by the use its balanced scorecard and financial benchmarking tools for all Burger King Corporate restaurants in the United States and Canada, totalling nearly 6,500 restaurants.
XFormity's solutions are based on a software-as-a-service delivery model that provides benefits to both the Company and its customers as existing Information Technology (IT) investments become more valuable by utilizing XFormity's service based integration and reporting solutions. XFormity's solutions do not require customers to replace, upgrade or develop expensive extension to existing tools, which translates into a much quicker return on investment. The Company has developed highly effective processes for providing services for an increasing number of customers while keeping costs down and high levels of customer service.
Significant Accounting Policies
Financial Statement Presentation
The Company's consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund its operations and debt obligations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of XFormity Technologies, Inc. and its wholly-owned operating subsidiary, XFormity, Inc (XFM). All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
All highly liquid investments with a maturity of 90 days or less at the time of purchase are considered to be cash equivalents. Cash equivalents include cash on deposit with banks and money market funds. At June 30, 2010 and 2009, the Company had cash equivalents of $61,754 and $10,767, respectively.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. The Company maintains its cash balances in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to any significant credit risk on cash. If during our evaluation of accounts receivable we determined that accounts were not collectable an allowance for doubtful accounts would be established. Management determined that no allowance was necessary at June 30, 2010 and 2009 based on the history, collectability and aging of the receivables.
Concentrations
During the fiscal years 2010 and 2009, Burger King Corporation represented more than 42% and 55%, respectively, of the Company’s total revenues. In both fiscal years 2010 and 2009, seven customers who are also stockholders of the Company, generated $362,500 and $338,600 of the Company's revenues, respectively. The Company believes it has excellent relationships with all of these customers except one who notified the Company that effective August 1, 2010, he would no longer use our services. The loss of that customer’s revenue will impact future year’s revenues by 6.6% without any further revenue increase.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable, loan payable and convertible debentures reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments.
Revenue Recognition
The Company contracts with clients for development and sale of business intelligence software solutions. Revenue derived from the sales of these products is billed on a monthly usage basis and is recognized in accordance with current accounting guidance, over the term of the agreement or at specific acceptance points. The Company, in many instances, receives payments from some of its customers in advance of the month of actual usage of the software product. These funds are reflected as deferred revenue until the month of usage, or specific acceptance points, when they are recognized as earned revenue.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is computed for financial statement purposes using accelerated methods over a five year estimated useful life of the assets.
Management has evaluated the difference between straight line and the accelerated method used and deemed the difference immaterial.
Software Development Costs
The Company capitalizes internally generated software development costs in accordance with current accounting guidance. Capitalization of software development costs begins when a product's technological feasibility is established. Costs incurred for research and development of products where technological feasibility has not yet been established are expensed as incurred. Research and development expense was $492,330 and $541,856 for 2010 and 2009, respectively. There were no capitalized software development costs.
Amortization of capitalized software development costs begins when the product is available for sale, and is amortized on a product-by-product basis. The annual amortization amount is the greater of (a) the straight line method over the remaining estimated economic life of the product or (b) the ratio of the product's current gross revenue to its total current and anticipated future gross revenue. There were no such costs reflected in the Company’s financial statements.
Beneficial Conversion Feature in Convertible Debentures
The Company had issued subordinated convertible debentures in prior years with conversion prices that at issuance may be lower than the fair market value of the underlying stock. Accordingly, in accordance with the then current accounting guidance, the Company recorded as a contra-liability at each issuance date, the excess of the fair market value at the date of issuance over the conversion price in the debenture with an off-setting increase in additional paid-in capital. This beneficial conversion feature was fully amortized at June 30, 2009 as a non-cash interest expense from the issuance date of the debenture through the earlier of the stated redemption date, which is one year from issuance, or conversion into common stock. The offset was a credit to Additional paid-in capital.
Share-Based Compensation
The Company is required to recognize expense of options or similar equity instruments issued to employees using the fair-value-based method of accounting for stock-based payments in accordance with current accounting guidance. This valuation method covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Application of this pronouncement requires significant judgment regarding the assumptions used in the selected option pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking over the expected term of the award. In fiscal year 2010, the share-based payment it issued to one of its directors is reflected in the non-cash charges of $17,673 included in general and administrative expenses. There were no options or stock awards granted in 2009.
Accounting for Derivative Instruments
All derivatives have been recorded on the balance sheet at fair value based on the lattice model calculation. These derivatives, including embedded derivatives in the Company’s warrants and its Convertible Notes outstanding as of June 30, 2010, which have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes, are separately valued and accounted for on the Company’s balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.
Lattice Valuation Model
The Company valued the conversion features and warrants in their convertible notes using a lattice valuation model, with the assistance of a valuation consultant. The lattice model values these instruments based on a probability weighted discounted cash flow model. The Company uses the model to develop a set of potential scenarios. Probabilities of each scenario occurring during the remaining term of the debentures are determined based on management's projections. These probabilities are used to create a cash flow projection over the term of the instruments and determine the probability that the projected cash flow will be achieved. A discounted weighted average cash flow for each scenario is then calculated and compared to the discounted cash flow of the instruments without the compound embedded derivative in order to determine a value for the compound embedded derivative.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt. The estimated fair value of cash, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments. The carrying value of long-term debt also approximates fair value since their terms are similar to those in the lending market for comparable loans with comparable risks. None of these instruments are held for trading purposes.
The Company utilizes various types of financing to fund its business needs, including convertible debt with warrants attached. The Company reviews its warrants and conversion features of securities issued as to whether they are freestanding or contain an embedded derivative and, if so, whether they are classified as a liability at each reporting period until the amount is settled and reclassified into equity with changes in fair value recognized in current earnings. At June 30, 2010, the Company had convertible debt and warrants to purchase common stock, the fair values of which are classified as a liability. Some of these units have embedded conversion features that are treated as a discount on the notes. Such financial instruments are initially recorded at fair value and amortized to interest expense over the life of the debt using the effective interest method.
Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level one - Quoted market price in active markets for identical assets or liabilities;
Level two - Inputs other than level one inputs that are either directly or indirectly observable;
Level three - Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that market participant would use
The following table presents assets that are measured and recognized at fair value on a non-recurring basis:
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with the units consisting of convertible debt and warrants to purchase common stock (discussed above). The Company classifies the fair value of these warrants under level three. The fair value of the derivative liability at June 30, 2010 was $357,242, and the change in fair value for the twelve months ended June 30, 2010 was a gain of $408,921.
Income Taxes
The Company accounts for income taxes in accordance with the current accounting guidance, The Company believes it does not have any uncertain tax positions taken or expected to be taken in its income tax returns.
The current accounting guidance requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between financial statement and income tax bases of assets and liabilities that will result in taxable income or deductible expenses in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets and liabilities to the amount expect to be realized.
Recent Accounting Standards
In October 2009, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition standards for arrangements with multiple deliverables, where certain of those deliverables are non-software related. The new standards permit entities to initially use management’s best estimate of selling price to value individual deliverables when those deliverables do not have Vendor Specific Objective Evidence (“VSOE”) of fair value or when third-party evidence is not available. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for annual periods ending after June 15, 2010 and early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on the Company’s consolidated financial position, results of operations and cash flows.
In June 2009, the FASB issued guidance establishing the Codification as the source of authoritative U.S. Generally Accepted Accounting Principles (“U. S. GAAP”) recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on changes in the Codification. All content in the Codification carries the same level of authority, and the U.S. GAAP hierarchy was modified to include only two levels of U.S. GAAP: authoritative and non-authoritative. The Codification is effective for the Company’s interim and annual periods beginning with the Company’s year ending June 30, 2010. Adoption of the Codification affected disclosures in the Consolidated Financial Statements by eliminating references to previously issued accounting literature, such as SFASs, EITFs and FSPs.
In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity. These new standards amend the evaluation criteria to identify the primary beneficiary of a variable interest entity and require ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The provisions of the new standards are effective for annual reporting periods beginning after November 15, 2009 and interim periods within those fiscal years. The adoption of the new standards will not have an impact on the Company’s consolidated financial position, results of operations and cash flows.
The Emerging Issue Task Force released a pronouncement related to determining whether an instrument (or imbedded Feature) is indexed to an entity’s own stock. This became effective for the Company on September 30, 2009. The Company’s warrants and its Series 2007 Secured Convertible Debt issued have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes. With the adoption of the pronouncement on July 1, 2009, the company recorded a cumulative effect of a change in accounting principle resulting in a reclassification of the Company’s outstanding warrants from stockholders’ equity to liabilities, which required the warrants to be fair valued at each reporting period, with the changes in fair value recognized in the Company’s consolidated statement of operations. At June 30, 2010, the Company recorded a derivative liability of $357,242 and a change in the fair value - derivative liability for the year ended June 30, 2010 of $(408,921).
Note 2 Receivables and Deferred Revenue
The Company contracts with its clients for the sale and usage of its business intelligence and financial software products. Many of the Company's customers are invoiced in the month preceding the use of the service. When these customers remit payment for the subsequent month's service during the month billed, those funds collected are recorded as deferred revenue until the actual month of service at which time they are recognized as revenue in the month earned.
The Company also develops and provides professional and technical services to its customers. Some of the technical services developed benefit the customers over extended periods of time and are recognized under current accounting guidance, over the term of the agreement or at specific acceptance points.
The Company had received respective non-refundable payments towards contracted projects in 2008 and in 2007 that were each accepted in the respective succeeding fiscal year. At June 30, 2010 and 2009, the Company reflected the unamortized amount of the contracts as deferred revenue and recognized as revenue the portions attributable to the underlying license agreements in fiscal years 2010 and 2009, respectively. The contracted project in 2007 was fully amortized at the end of the current year and the unamortized revenue of $44,000 from the 2008 project will be fully amortized by the end of June 2011.
Receivables include only funds due from customers who have not paid for the monthly service provided. Due to the high collectability factor either by prepayment or within 60 days of usage, and the Company's experience with uncollectible accounts, no allowance for doubtful accounts is necessary.
The Company’s receivables at June 30, 2010 and 2009 are $54,861 and $35,161.
Note 3 Prepaid expenses
Prepaid expenses represent the unexpired portion of the Company's insurance coverage, the current portion of the deferred commission (see Note 5 below), the refundable security deposit under the terms of the operating lease at the Dallas, TX office, advance registrations at various trade shows, and other operating expenses applicable to the subsequent fiscal year.
.
Note 4 Property and Equipment
Property and equipment are stated at cost. During the current year, the Company discarded various computer and related equipment totaling $12,676 that was fully depreciated and removed the cost and related accumulated depreciation from it books. Depreciation of property and equipment is computed under accelerated methods over a five year estimated useful life of the assets. Depreciation expense for the years ended June 30, 2010 and 2009 was $22,035 and $23,272, respectively. Management has evaluated the difference between straight line and the accelerated method used and deemed the difference immaterial.
Property and equipment consisted of the following:
Note 5 Other Assets
Security Deposit
A deposit of $26,120 was required under the lease agreement commencing on June 1, 2008 on the Company's office space in Dallas, Texas. Under terms of the lease, the Company received $17,413 of its security deposit back on September 1, 2009.
Deferred Commission
In August 2007, the Company renegotiated its commission agreement with an outside consulting company that was to receive 15% commission for a five year period on all sales to one of the Company’s customers. The terms of the new agreement provide for monthly payments of $3,000 for four years commencing July 1, 2007 and the issuance of one million shares of the Company’s common stock. The determination of the amount of $147,048 was based on the fair value of the issued common stock at the commitment date in accordance with current accounting guidance and is amortized over the life of the contract.
Note 6 Debt Reduction Obligation
In October 2008, the Company signed an agreement with its patent counsel to issue 1,000,000 shares of the Company’s common stock issued on October 24, 2008 at the closing price of $0.14 per share for a total value of $140,000, to pay cash payments of $10,000 that extend over 48 months for a total of $480,000 and four additional debt reduction payments of $65,000 over a 3 year period, each contingent upon the Company achieving revenue targets of 2 million, 3 million and 4 million, respectively, for a total of $260,000. This resulted in a gain of $763,769 in full settlement of the Company’s obligation of $1,578,769. In the current year, the Company did not achieve the revenue targets and thus further reduced the maximum payout by $65,000 to $490,000 at June 30, 2010 resulting in a further gain of $65,000 in 2010. The Company discontinued any further payments under this agreement after September 2009 and is currently in further discussions with the law firm and expects to favourably resolve this matter by the end of the current calendar year. As of June 30, 2010 the loan is in default and included in current liabilities.
Note 7 Accounts Payable
Accounts payable represents balances due to trade creditors, licensor and fees for professional services incurred for legal, and audit services.
Note 8 Accrued Expenses
Under the terms of the 401(K) retirement plan, mandatory contributions are required by the Company for 3% of the employees’ pay during the plan year. The amounts in the plan are fully vested with the employees. The Company’s expense under this plan was $26,285 and $24,813 for the years ended June 30, 2010 and 2009, respectively.
Note 9 Convertible Debentures
In October 2008, the Company issued $10,000 of the 9% debentures to one of its employees who is deemed to be an accredited investor. There was no discount or commission incurred on this sale of the debenture. The beneficial conversion feature was calculated as the difference between the market price of the Company’s common stock on the date of issuance of the convertible debenture less the effective conversion price of $0.12. The Company valued the beneficial conversion feature at its intrinsic value with a corresponding credit to additional paid-in capital in the amount of $2,500. The amortized amount of the beneficial conversion feature in the 9% convertible debentures in the years ended June 30, 2009 was a non-cash charge to income of $2,500. The Company accounted for the new debentures in accordance with current accounting guidance.
In February 2010, the Board of Directors authorized the Company, with the mutual agreement of the debenture holders, to extend the maturity dates of their respective notes in consideration for the extension of the expiration dates of the warrants attached to the convertible debentures if the debenture holders elect to convert their notes into the Company’s common stock. The $0.14 warrants will expire on January 31, 2012 and the $0.18 warrants will expire on January 31, 2013. The majority debenture holder, whose note matured July 31, 2010, elected not to extend the maturity date thereby all of the debentures would be considered in default. During August and September of 2010, the Company sold an additional $198,000 of its 9% series 2007 convertible debentures as part of its efforts to raise additional capital and thus the one note holder became less than a majority holder and as of the date of this report, the notes are deemed not in default.
As of June 30, 2010 and 2009, the Company has outstanding an aggregate of $733,635 of the 9% convertible debentures that mature between January 31 and June 30, 2011. Of that amount, $563,554 is held by stockholders who are also customers of the Company and employees of the Company. Accrued interest on the debentures was $78,323. In August 2010, The Board of Directors authorized the Company to sell an additional $500,000 of the 9% convertible debentures and as the date of this report has issued $198,000 to accredited investors. The Company has no assurance as to how much in additional subscriptions will be received in the private offering.
If all of the remaining debenture holders at June 30, 2010 elected to convert their debentures and warrants into shares of the Company’s common stock, the Company would be required to issue an additional 10,149,478 shares.
Note 10 Deferred Credits
In January 2006, the Board of Directors and two of its customers, agreed in lieu of an issuance of the Company’s common stock, to receive $150,000 in billing credits applied against their monthly business intelligence software billings at a rate of 25% of the billings commencing January 1, 2006 and July 1, 2006, respectively.
The deferred credits at June 30, 2010 in the respective amounts of $83,667 and $78,196, net of amortization, are expected to be utilized over a 10 to 11 year period based on their current billing rates using a 5% discount rate that approximated the risk-free rate in effect during the offered option period.
Note 11 Derivative Liabilities
The Company’s warrants and its Convertible Notes have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes. This ratchet provision results in a derivative liability in our financial statements.
Our derivative liabilities increased from $0 at June 30, 2009 to $357,242 at June 30, 2010. As of July 1, 2009, the fair value of these warrants of $766,163 was recognized and resulted in a cumulative effect adjustment to accumulated deficit of $9,021,509. The change in fair value during the year ended June 30, 2010 of $408,921.
The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at June 30, 2010 and June 30, 2009:
June 30, 2010
June 30, 2009
Common stock warrants
$
43,870
$ -
Embedded conversion features
313,372
-
Total
$
357,242
$ -
At June 30, 2010, the derivatives in the debentures and warrants are as follows:
Cumulative effect on July 1, 2009 $766,163
Change in derivative liability during year ended June 30, 2010 (408,921)
Total $357,242
Note 12 Note Payable-Related Party
In June 2009, the loan payable of $100,000 and the accrued interest thereon of $18,667 to one of its customers that is affiliated with one of the Company’s shareholders were acquired by another related entity. The Company signed a new note, capitalized the previous accrued interest as principal, and bears interest at 7% maturing November 1, 2011. Accrued interest on the note is $8,307. On August 31, 2010, the Company sold $128,000 of its corporate debentures and used the proceeds to retire the loan payable and the accrued interest.
Note 13 Income Taxes
As of July 1, 2007, the Company adopted the provisions of the current accounting standards, Accounting for Uncertainty in Income Taxes, which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. The Company believes it does not have any uncertain tax positions taken or expected to be taken in its income tax returns.
At June 30, 2009, the Company had net operating loss carry-forwards totaling approximately $15,150,000 that begin to expire in 2017 through 2028. The carry-forward losses and the related deferred tax benefit are significantly limited by the provisions of Internal Revenue Code Section 382. The Company’s taxable losses, as determined by an independent tax advisor, have created a deferred tax benefit of approximately $1,956,000 that is fully reserved.
In 2010, the primary differences between financial statement reporting and taxable income (loss) was; (1) the change is fair value of the derivatives in not reportable for tax purposes (2) the gain on debt reduction of $65,000 was not includible in taxable income as the deduction was not taken in prior years; (3) revenues of $84,000 from professional fees under GAAP were included in fiscal years 2008 and 2007 taxable calculation and thus excludible in fiscal year 2010; (4) the non-cash share based payments of $17,673 under current accounting guidance is not deductible for tax purposes. However, no tax benefit, either from the prior year's or current year's losses, has been reported in the June 30, 2010 and 2009 financial statements because utilization of the carry-forward is not more likely than not. In the prior year, the Company used up its Texas Net Operating Loss for purposes of the States’ Franchise tax and incurred a liability approximating $13,000 for the current fiscal year.
In 2009, the primary differences between financial statement reporting and taxable income (loss) was; (1) the gain on debt reduction of $769,763 was not includible in taxable income as the deduction was not taken in prior years; (2) revenues of $84,000 from professional fees under GAAP were included in fiscal years 2008 and 2007 taxable calculation and thus excludible in fiscal year 2009. However, no tax benefit, either from the prior year's or current year's losses, has been reported in the June 30, 2009 and 2008 financial statements because utilization of the carry-forward is not more likely than not.
The deferred tax asset at June 30, 2010 and 2009 is as follows:
Note 14 Stockholders' Equity
Capital Stock
The Company’s capital structure consists of two classes of stock, preferred and common. The preferred shares, none of which have been issued, if issued may have a claim to assets superior to those of the common stockholders.
On October 24, 2008, the Company issued 1,000,000 shares of its common stock as a partial payment under the debt reduction agreement with one of its creditors for a total fair value of $140,000 based on the closing stock price on the date of the grant. After the above transaction, the Company had no further issuances of its common stock in fiscal years 2009 and 2010.
Stock Options
In August 2009, the Board of Directors of the Company approved the grant and issuance of options exercisable to purchase an aggregate of 250,000 shares of common stock. The options are exercisable until December 12, 2016 (the “Expiration Date”) at an exercise price equal to $0.08 per share (the “Exercise Price”), which was equal to 100% of the closing market price of the Company’s common stock, as quoted on the OTC Electronic Bulletin Board, on the grant date. The options were granted and issued under the Company’s 1999 Equity Incentive Plan (the “Plan”) and are subject to the terms and conditions of the Plan. See Note 16 for the estimation of the fair value of the options granted using the Black-Scholes option pricing model.
Note 15 Loss per Share
Basic loss per share is calculated based on the weighted-average number of outstanding common shares. Diluted loss per share is calculated based on the weighted-average number of outstanding common shares plus the effect of dilutive potential common shares. For the years ended June 30, 2009 and 2008, the fully diluted weighted average number of shares is the same as the basic weighted average number of shares as the conversion of options and warrants would be anti-dilutive.
Net loss per share has been computed using the following weighted average number of shares:
Note 16 Share-Based Compensation
The fair value at the date of grant using the Black-Scholes valuation model for options issued in fiscal 2010 was estimated using the following weighted average assumptions respectively: (a) no dividend yield on our common stock, (b) expected stock price volatility of 187.91%, (c) a risk free interest rate of 1.76% and (d) an expected option term of 2.8 years. The expected term of the options represents the estimated period of time until exercise giving consideration to the contractual terms, the immediate vesting and expectations of future employee behavior. For fiscal 2010, expected stock price volatility is based on the historical volatility of our stock. The risk-free interest rate is based on the U.S. Treasury bill rate in effect at the time of the grant with an equivalent expected term of life. The Company has not paid any dividends in the past and does not currently plan to any dividends in the future. The non-cash charge of $17,673 for the share-based compensation in fiscal 2010 represents the total fair value and was recorded in accordance with current accounting guidance. The Company had no stock-based compensation expense in 2009.
Note 17 1999 Equity Incentive Plan
On October 19, 1999, the Company adopted the 1999 Equity Incentive Plan to provide incentives to employees, directors and consultants. On May 14, 2001, the stockholders approved an increase in the number of options reserved under the Plan from 1,000,000 to a total of 1,500,000 shares of common stock for issuance with the maximum term of options being ten years. On November 13, 2003, the Company's stockholders approved an increase in the number of shares issuable under the Plan equal to 20% of the issued and outstanding shares. The Board of Directors, which has the exclusive power over the granting of options and their vesting provisions, has granted a total of 7,025,000 options to executives, employees, directors and one vendor that were fully vested as of the date of the grant. All options granted have a seven-year term.
Note 18 Related Party Transactions
Seven of our customers who are also stockholders in the Company, generated revenues approximating $362,500 and $338,600 in the years ended June 30, 2010 and 2009. A principal in one current customer serves as a member of the Board of Directors and the Audit Committee.
In October 2008, an employee of the Company purchased $10,000 of the 9% convertible debentures for cash.
In June 2009, the loan payable of $100,000 from one of the Company’s customers that is affiliated with one of the Company’s shareholders was purchased by a related party including the accrued interest of $18,667. The new note of $118,667 bears interest at 7% and matures November 1, 2011.
The Company paid rent in the amount of $8,000 to a significant shareholder for its office space in Northbrook, Illinois, including administrative services, during the fiscal year ended June 30, 2009. The month-to-month rental agreement was terminated February 28, 2009.
Note 19 Commitments and Contingencies
Leases
In June 2008, The Company entered into a 64 month “triple net” lease agreement. Terms of the agreement provide for an average base rent of $4,329 over the term of the lease plus the Company’s pro rata share of real estate and common area costs.
The Company also has a one year lease for $650 per month at its Northbrook, Illinois office that will increase to $700 per month effective October 1, 2010. Total rent expense for the fiscal years ended June 30, 2010 and 2009 was $59,742 and $62,867, respectively. The Company accounts for these leases as operating leases in accordance with current accounting guidance.
Concentrations
During the fiscal years 2010 and 2009, Burger King Corporation represented more than 42% and 55%, respectively, of the Company’s total revenues. In both fiscal years 2010 and 2009, seven customers who are also stockholders of the Company, generated $362,500 and $338,600 of the Company's revenues, respectively. The Company believes it has excellent relationships with all of these customers except one who notified the Company that effective August 1, 2010, he would no longer use our services. The loss of that customer’s revenue will impact future year’s revenues by 6.6% without any further revenue increase.
Contracts
In 2010, the Company extended the maturity dates of the convertible debentures with the exception of its then majority holder and negotiated a new note with a related party. In August and September 2010, the Company sold an additional $198,000 of it 9% Convertible Debentures to related parties, all of whom are accredited investors.
In August 2007, the Company renegotiated a commission agreement with an outside consulting company. The terms of the new agreement provide for monthly payments of $3,000 for four years commencing July 1, 2007.
Scheduled principle payments on the above obligations are as follows:
Licenses
In January 2007, the Company executed a Settlement Agreement and Release of Claims with a competitor providing for the full and final settlement of patent litigation. Under the terms of the Settlement Agreement, the Company was granted a non-exclusive license to utilize the patent that formed the subject matter of the litigation. In consideration of that license, the Company agreed to pay a royalty fee ranging between 6.0% and 7.5% but only on revenues generated from the Company’s business intelligence software provided within the restaurant industry. The total expense under this agreement for the years ended June 30, 2010 and 2009 is $80,356 and $75,054, respectively. The Company has not paid the current year’s obligation of $80,356 that is reflected in the accounts payable above.
Litigation
As of the date of this report, there are no pending legal proceedings in which we or any of our officers, directors or affiliates is a party, and we are not aware of any threatened legal proceedings.
Contingencies
None
Note 20 Going Concern
As shown in the accompanying consolidated financial statements, the Company has incurred an operating deficit of $9,021,513 through the fiscal year ended June 30, 2010. The Company is continually reviewing its operations and attempting to improve operating results and its balance sheet. The Company's ability to continue as a going concern is dependent on its ability to improve operating results and increase its financing cash flows, if any. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 21 Subsequent Events
In August 2010, the Board of Directors authorized an increase in the debt limit of the Convertible Debentures by $500,000 and as of the date of this report has sold $198,000 to accredited investors.
The Company is attempting to negotiate the amount due under the debt reduction agreement at less than its face value and expects to reach a favourable resolution by the end of the calendar year.
Note 22 Restatement of the Quarters ended September 30, 2009, December 31, 2009 and March 31, 2010
The Company has restated its quarterly unaudited financial statements to reflect the current accounting guidance, “Determining Whether an Instrument (or imbedded Feature) is Indexed to an Entity’s Own Stock”. The Company’s 9% Convertible Debentures and the Warrants previously issued have reset provisions to the exercise price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes. This provision required a reclassification to the liability based on the reset feature of both the debentures and warrants if the Company sells equity or derivatives at a price below the exercise price of the notes and warrants.
Following are the restated financial statements for the three quarters:
XFormity Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
XFormity Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
Item 9
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None, except as previously disclosed.
Item 9A
Item 9A Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“the Exchange Act”). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are ineffective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, and summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our Principal Executive Officer and Principal Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive and financial officer have determined that our disclosure controls and procedures are not effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company's operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2010. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment we believe that, as of June 30, 2010, our internal control over financial reporting was ineffective based on those criteria.
A material weakness is a deficiency, or a 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. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. We have identified the following material weaknesses:
· As of June 30, 2010, effective controls over financial statement disclosure were not maintained. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.
· As of June 30, 2010, effective controls over transactions were not maintained. Specifically, controls were not designed and in place to ensure that the derivative liabilities were properly reflected. Accordingly, management has determined that this control deficiency constitutes a material weakness. This material weakness resulted in restatement of the three quarterly periods ended September 30, 2009, December 31, 2009, and March 31, 2010.
Changes in Internal control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting through the date of this report or during the quarter ended June 30, 2010, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Independent Registered Accountant’s Internal Control Attestation
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 the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Part III
Item 10.
Item 10.
Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Securities Exchange Act.
Our directors are each elected and serve until their qualified successor has been elected. Each is elected at each annual meeting of our stockholders. None of the independent directors received any compensation other than reimbursement of any expenses for attending the respective board meetings.
Listed below is biographical information for each of the directors, executive officers and persons of control including their principal occupation and other business affiliations.
Chris Ball, 44, has served as XFormity's Chief Executive Officer since April 25, 2006. From June 2002 through April 25, 2006, he served as XFM's Chief Operating Officer. From April 2000 through May 2002, he worked as Vice President, Operations for VertaPort, Inc. From May 1998 through March 2000, he worked as a project management consultant for a division of US Freightways. As a consultant for the US Freightways' division, he was responsible for the development of their business-to-business auction solution. Mr. Ball earned a Bachelor of Science Degree in Aerospace Engineering from California Polytechnic University and a Masters in Business Administration from Texas Christian University.
C. Drew Seale, 41, has served as XFormity's Chief Technology Officer since September 2004. From June 2002 through September 2004, he served as XFM's Chief Technology Officer. From September 1999 through May 2002, he worked as the Vice President of Applications Development for VertaPort, Inc., where he was responsible for all technology development. From January 1996 through August 1999, he worked as the Director of Application Architecture for Sea-Land, Inc., a shipping company with over 9,000 employees. Mr. Seale earned a Bachelor of Science Degree (BS) in advertising from the University of Texas and a Master in Business Administration from Texas Tech University.
Jack Rabin, 70, has been our Chief Financial Officer since July 2004 and a director since March 2004. He was also Chief Financial Officer of Paradigm Group II, LLC since its inception in 2000 until June 30, 2004. Previously he served as Chief Financial Officer of a major national underwriting firm from 1998 to 2000 and Corporate Controller of the Illinois Superconductor Corp. from 1993 to 1998. He received a BS degree in business administration from Roosevelt University in 1961 and has a CPA certificate from the University of Illinois.
Michael Shahsavari, 61, has worked in the restaurant industry for the past 25 years as an owner and Chief Financial Officer of franchisees for major brands such as Taco Bell and Pizza Hut. In total, the companies with which Mr. Shahsavari is affiliated employ over 1800 people. Mr. Shahsavari received a Bachelor of Arts in accounting from the London School of Accountancy and is a Fellow member of the Institute of Chartered Accountants in England & Wales and is the Chairman of the Board and Chairman of the Audit Committee.
Ken Johnson, 57, for the past 15 years, Mr. Johnson has served as President of NA Sales, Inc. a consulting firm specializing in sales, marketing and business development. Mr. Johnson has been paid as an outside consultant to the Company since December 2006. Current clients, besides XFormity, Inc include RSM McGladrey Financial Process Outsourcing. Other past clients include Pillsbury/Green Giant Fresh where he played a major role in the development of new products and markets for that produce brand; Golden State Foods Corporation where he worked to develop and implement a sales and marketing plan to pursue chain account manufacturing business; John I. Haas, a worldwide leader in the growing and marketing of Hops where he worked on the integration of a diverse line of manufacturing businesses that they acquired.
Farsheed Ferdowsi, 55, was the Founder, President and CEO of PayMaxx, Inc. prior to its sale to CompuPay, Inc. in July 2005. Founded in 1991, PayMaxx was a technology-centric, customer-focused payroll outsourcing service provider. At the time of its sale, it ranked among the top-10 in its industry and served clients in all 50 states. After the business combination with CompuPay, Mr. Ferdowsi served the combined entity as a member of the Executive Team as Chief Development Officer until August 2007. Subsequently, he launched Victor Hope Capital, LLC to seek opportunities in private equity investments and real estate development projects. The Nashville Business Journal named Mr. Ferdowsi the 2002 Entrepreneur of the Year. Mr. Ferdowsi holds a Master’s degree in structural engineering from the University of California in Berkeley and a Bachelor’s degree in civil engineering from Vanderbilt University.
Mr. Ferdowsi’s brother, Farzin, is the owner of 5.47 % of the Company’s common stock
Paul Dwyer, 47, is the former President of Commercial Operations for SEI Information Technology, where he had overseen marketing, business development, account management and strategic product planning activities from January 2003 until September 2006. He is currently an independent consultant. Mr. Dwyer holds a Bachelor of Arts Degree in English Literature from Marquette University and previously served on the Audit Committee.
During the last five (5) years no director or officer of the Company, other than Mr. Shahsavari, has:
a.
had 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; Mr. Shahsavari was an executive officer in a privately owned Company that filed for bankruptcy during the current year.
b.
been convicted in a criminal proceeding or subject to a pending criminal proceeding;
c.
been 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 involvement in any type of business, securities or banking activities; or
d.
been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Any transactions between the Company and its officers, directors, principal shareholders, or other affiliates have been and will be on terms no less favourable to the Company than the Board of Directors believes could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company's independent, outside disinterested directors.
Nomination Process
The Board of Directors has not appointed a standing nomination committee and does not intend to do so during the current year. The process of determining director nominees has been addressed by the board as a whole, which consists of currently seven members. The board has not adopted a charter to govern the director nomination process.
Of the currently serving seven directors, four would not be deemed to be independent within the meaning of the National Association of Securities Dealers, Inc.'s listing standards. For this purpose, a director is deemed to be independent if he does not possess any vested interests related to those of management and does not have any financial, family or other material personal ties to management.
The Board of Directors has not adopted a policy with regard to the consideration of any director candidates recommended by security holders, since to date the board has not received from any security holder a director nominee recommendation. The board of directors will consider candidates recommended by security holders in the future. Security holders wishing to recommended a director nominee for consideration should contact Mr. Christopher Ball, Chief Executive Officer and President, at the Company's principal executive offices located in Dallas, Texas and provide to Mr. Ball, in writing, the recommended director nominee's professional resume covering all activities during the past five years, the information required by Item 401 of Regulation SK, and a statement of the reasons why the security holder is making the recommendation. Such recommendation must be received by the Company before June 30, 2011.
The Board of Directors believes that any director nominee must possess significant experience in business and/or financial matters as well as a particular interest in the Company's activities.
Meetings and Committees of the Board of Directors
The Board meets as often as necessary to perform its duties and responsibilities.
a. Meetings of the Board of Directors
During the fiscal year ended June 30, 2010, four meetings of the Board of Directors were held, including scheduled and special meetings, each of which were attended by a minimum of five, if not all of the seven Directors. Meetings are conducted either in person or by telephone conference.
Mr Dwyer did not attend the last 4 meetings due to business conflicts.
Outside Directors receive no compensation for their attendance at meetings, although they are reimbursed their expenses associated with such attendance. Messrs. Ferdowsi received stock option grants for $250,000 shares at an exercise price of $0.08 expiring in seven years in fiscal year ended June 30, 2010.
b. Committees
The Board appoints committees to help carry out its duties. In particular, board committees work on key issues in greater detail than would be possible at full board meetings. Each committee reviews the result of its meetings with the full board.
During the year ended June 30, 2010, the board had standing audit and compensation committees.
Audit Committee and Audit Committee Financial Expert
In 2010, the audit committee was composed of Mr. Shahsavari, Mr. Seale and Mr. Rabin.
The Board of Directors has determined that Mr. Shahsavari is independent and qualified as an Audit Committee financial expert within the meanings of Regulation S-K, Section 407(d) (5) (i) and (ii). For this purpose, an audit committee member is deemed to be independent if he does not possess any vested interests related to those of management and does not have any financial, family or other material personal ties to management.
During the fiscal year ended June 30, 2010 the audit committee had four meetings. The committee is responsible for accounting and internal control matters. The audit committee:
-
reviews with management, the independent auditors policies and procedures with respect to internal controls;
-
reviews significant accounting matters;
-
approves any significant changes in accounting principles of financial reporting practices;
-
reviews independent auditor services; and
-
Recommends to the Board of Directors the firm of independent auditors to audit our consolidated financial statements.
In addition to its regular activities, the committee is available to meet with the independent accountants or Chief Financial Officer whenever a special situation arises.
The Audit Committee of the Board of Directors has adopted a written charter, which has been previously filed with the Commission.
Audit Committee Report
The Audit Committee, consisting of Mr. Michael Shahsavari, Chairman of the Board, Mr. Drew Seale and Mr. Jack Rabin, have reviewed and discussed the audited financial statements with management and with M&K CPAS, PLLC and the matters required to be discussed by Statement of Auditing Standards No. 114.
1.
The Audit Committee has received the written disclosures and the letter from M&K CPAS, PLLC required by Independence Standards Board Standard No. 1 and has discussed with them their independence.
2.
Based on the review and discussions referred to above, the Audit Committee has recommended to the Board of Directors that the audited financial statements for the years ended June 30, 2010 and 2009 be included in the Company's Annual Report of Form 10-K for the fiscal year ended June 30, 2010 for filing with the Commission.
By the Audit Committee: Mr. Shahsavari, Mr. Seale and Mr. Rabin.
Compensation Committee
During the fiscal year ended June 30, 2010, the Compensation Committee was comprised of Messrs. Ferdowsi, Johnson and Ball who determined and approved appropriate executive compensation and under the bonus arrangement. The Committee will continue to evaluate and determine executive compensation for the fiscal year ended June 30, 2011 based on the Company’s performance.
The compensation advisory committee:
1.
recommends to the board of directors the compensation and cash bonus opportunities based on the achievement of objectives set by the compensation advisory committee with respect to our chairman of the board and president, our chief executive officer and the other executive officers;
2.
administers our compensation plans for the same executives;
3.
determines equity compensation for all employees;
4.
reviews and approves the cash compensation and bonus objectives for the executive officers; and
5.
reviews various matters relating to employee compensation and benefits
Shareholder Communications
Any shareholder of the Company wishing to communicate to the Board of Directors may do so by sending written communication to the board of directors to the attention of Mr. Chris Ball, Chief Executive Officer, at the principal executive offices of the Company. The Board of Directors will consider any such written communication at its next regularly scheduled meeting.
Compliance with Section 16(a) of the Exchange Act:
Under the securities laws of the United States, the Company's directors, its executive officers and any persons holding more than 10% of the Company's common stock are required to report their ownership of the Company's common stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established by rules adopted by the SEC and the Company is required to report in this Annual Statement any failure to file by those deadlines.
Based solely upon public reports of ownership filed by such persons and the written representations received by the Company from those persons, all of our officers, directors and 10% owners have satisfied these requirements during the most recent fiscal year.
Code of Ethics
The Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees subsequent to fiscal year ended June 30, 2004. This was filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2004. The Company will provide to any person without charge, upon request, a copy of our Code of Business Conduct and Ethics. Such request should be made in writing and addressed to Investor Relations, XFormity Technologies, Inc., 4100 Spring Valley Road, Suite 800, Dallas, Texas 75244. Further, our Code of Business Conduct and Ethics may be viewed on our internet website at www.xformity.com or on the website of the SEC at www.SEC.gov.
Item 11
Item 11 Executive Compensation.
The following tables and discussion set forth information with respect to all plan and non-plan compensation awarded to, earned by or paid to our Chief Executive Officer ("CEO"), the Company's three most highly compensated executive officers other than the CEO or principal executive officers, for all services rendered in all capacities to the Company for the last fiscal year; however, no disclosure has been made for any executive officer, other than the CEO and principal executive officers, whose total annual salary and bonus does not exceed $100,000 except for the CFO. Under 402(a) (5), the Company has excluded all columns where there was no compensation applicable to the named officers or directors.
SUMMARY COMPENSATION TABLE
Name and Principal Position
Fiscal Year
Salary ($)
Option Award ($)
All Other Compensation ($)
Total ($)
Chris Ball, Chief Executive Officer
144,888
138,408
122,400
271,168(1)
250(2)
250(2)
2502)
145,138
138,658
393,818
C. Drew Seale, Chief Technical Officer
144,888
138,408
122,400
271,168(1) -
250(2)
250(2)
250(2)
145,138
138,658
393,818
Jack Rabin, Chief Financial Officer
78,444
72,264
61,200
135,584(1)
250(2)
250(2)
250(2)
78,694
72,514
197,034
(1) This amount represents the dollar amount recognized for financial reporting purposes with respect to fiscal 2008 for the fair value of stock options granted to the above executives in 2008 in accordance with current accounting guidance. Assumptions used in the calculation of this amount are included in Note 13 to the Company’s audited financial statements for the year ended June 30, 2008. These amounts reflect the Company’s accounting expense for these awards, and do not correspond to the actual value that will be recognized by these named officers.
(2) Includes total cost of term life insurance premiums paid for employees' coverage up to $50,000.
The following table sets forth information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of the end of the most recently completed fiscal year:
All of the unexercised options are fully vested and there are no outstanding equity incentive plan awards currently granted.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE
(1)
This amount represents the dollar amount recognized for financial reporting purposes with respect to fiscal 2008 for the fair value of stock options granted to the above executives in 2008 in accordance with current accounting guidance. Assumptions used in the calculation of this amount are included in Note 13 to the Company’s audited financial statements for the year ended June 30, 2008.
DIRECTORS COMPENSATION
(d) This amount represents the dollar amount recognized for financial reporting purposes with respect to fiscal 2010 for the fair value of stock options granted to the above executive on August 12, 2009 and December 12, 2007, respectively, in accordance with current accounting guidance. Assumptions used in the calculation of this amount are included in Note 15 to the Company’s audited financial statements for the year ended June 30, 2010.
Compensation Discussion and Analysis
Over the past three years, the executive compensation was determined by the compensation committee consisting of the Chairman of the Board and one other director. During this tenure, management has not received any equity awards or other forms of compensation other than as reflected in the table above. The compensation committee’s philosophy is that executive compensation should enable the Company to attract, retain and motivate a team of highly qualified executives who will create long-term value for the shareholders. To that end, the committee believes that an executive compensation program should include cash, bonuses and equity-based compensation that reward specific performance. The compensation committee has structured a bonus program for its executives approximating a reasonable percentage of their existing salaries to be paid only upon achievement of specific performance results. The committee continues to monitor the effectiveness of this program to ensure that the compensation provided to Company executives remains competitive relative to the compensation paid to executives in the Company’s industry.
No executive officer, director or control person received compensation, perquisites and other personal benefits during the fiscal years ended June 30, 2010, 2009 and 2008 other than as reflected in the above table.
The compensation committee of the Board of Directors has recommended that this Compensation Discussion and Analysis be included in the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2010.
Equity Incentive Plan
The Company has an Equity Incentive Plan which allowed the granting of stock options to employees of the Company and its subsidiaries and service providers up to an aggregate of 1,500,000 common shares. The stockholders of the Company subsequently granted the Board of Directors authority to increase the total authorization under the Company’s plan to 20% of the number of outstanding shares of common stock.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information with respect to beneficial ownership of our common stock at August 14, 2009 by each person who beneficially owns more than 5% of the common stock; by each of our executive officers named in the Management section; by each of our Directors; and by all executive officers and Directors as a group. Unless otherwise indicated, we believe all persons in the table have sole voting and investment power for all shares beneficially owned by them. (1)
(1)
Beneficial ownership is based on information provided to us, and the beneficial owner has no obligation to inform us of or otherwise report any changes in beneficial ownership. Except as indicated, and subject to community property laws when applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
(2)
The percentages shown are calculated based upon 51,931,553 shares of common stock outstanding on August 14, 2010. In calculating the percentage of ownership, unless as otherwise indicated, all shares of common stock that the identified person or group had the right to acquire within 60 days of August 14, 2010 upon the exercise of options, warrants and conversion feature under the convertible debenture are deemed to be outstanding for the purpose of computing the percentage of shares of common stock owned by such person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by any other person.
(3)
Unless otherwise stated, the beneficial owner's address is c/o 4100 Spring Valley Road, Suite 800, Dallas, Texas 75244. Jack Rabin’s address is 707 Skokie Blvd. Suite 500, Northbrook, IL 60062. Messrs. Shahsavari, Ferdowsi and Aminmadani address is 1728 General George Patton Drive, Suite 200, Brentwood, TN 37027. Donald Ghareeb’s address is 4268 Cahaba Heights Court, Birmingham, AL 35243.
(4)
Includes stock options to acquire 2,000,000 shares at $0.16; Includes debenture convertible to acquire 83,333 shares at $0.12 per share; warrants to acquire 20834 shares at $0.14; warrants to acquire 20,833 shares at $0.18, at the option of the holder
(5)
Includes stock options to acquire 2,000,000 shares at $0.16
(6)
Includes stock options to acquire 250,000 shares at $0.16
(7)
Includes debenture convertible to acquire 57,016 shares at $0.12 per share; warrants to acquire 457,161 shares at $0.14; warrants to acquire 457,161 shares at $0.18, at the option of the holder.
(8)
Includes debenture convertible to acquire 56,999 shares at $0.12 per share; warrants to acquire 457,157 shares at $0.14; warrants to acquire 457,157 shares at $0.18, at the option of the holder.
(9)
Donald Ghareeb is the controlling person of Tacala, LLC and is considered to be the beneficial owner of shares owned by Tacala, LLC. Includes debenture convertible to acquire 3,873,934 shares at $0.12 per share; warrants to acquire 1,385,151 shares at $0.14; warrants to acquire 1,385,151 shares at $0.18, at the option of the holder.
(10)
Mr. Rabin has gifted 290,000 shares to the Arthur J. Rabin Irrevocable Marital Trust, in which Mr. Rabin disclaims any beneficial ownership. Includes stock options to acquire 1,000,000 shares at $0.16. Includes debenture convertible to acquire 83,333 shares at $0.12 per share; warrants to acquire 20,834 shares at $0.14; warrants to acquire 20,833 shares at $0.18, at the option of the holder
(11)
Includes stock options to acquire 250,000 shares at $0.16
(12)
Includes stock options to acquire 250,000 shares at $0.16
(13)
Paradigm Group II, LLC was the sole General Partner of Paradigm Millennium Fund, LP and, as such, was considered to be the controlling person of Paradigm Millennium Fund, LP. All of the shares controlled by Paradigm Group II, LLC, including those of the Millennium Fund, LP, were distributed on July 24, 2009 to the limited partners of the fund and to the respective members of Paradigm Group II, LLC.
Item 13.
Item 13. Certain Relationships and Related Party Transactions.
In December 2007, the Board of Directors approved grants for the Company’s management, employees and members of the Board. Chris Ball and Drew Seale each received 2 million options; Jack Rabin received 1 million options, with respective recognized values of $271,168 and $135,584 for financial reporting purposes. Michael Shahsavari, Paul Dwyer and Ken Johnson each received 250,000 options with recognized values for accounting purposes of $33,896 each.
In August 2009, the Board of Directors approved a grant of 250,000 options to Farsheed Ferdowsi, the newest member of the Board with a recognized value of $17,673 for accounting purposes.
In the fiscal year ended June 30, 2009, the Company paid Paradigm Group II, LLC rent of $8,000. The rent included administrative services provided to the Company. The Company terminated this agreement as of March 1, 2009.
Customers, who are also stockholders in the Company, generated revenues approximating $362,000 and $338,000 in fiscal years 2010 and 2009, respectively. Michael. Shahsavari, a principal in one of those customers, has served as Chairman of the Board of Directors and a member of the Audit Committee.
Item 14.
Item 14. Principal Accountant Fees and Services.
In 2008, the Company retained M&K CPAS, PLLC as our principal accountants to audit the financial statements for fiscal years ended June 30, 2010 and 2009. We understand the need for our principal accountants to maintain objectivity and independence in their audit of our financial statements. To minimize relationships that could appear to impair the objectivity of our principal accountants, our Audit Committee has restricted the non-audit services that our principal accountants may provide to us primarily to tax services and audit related services. We are only to obtain non-audit services from our principal accountants when the services offered by our principal accountants are more effective or economical than services available from other service providers, and, to the extent possible, only after competitive bidding. These determinations are among the key practices previously adopted by the Audit Committee effective June 2005. The board has adopted policies and procedures for pre-approving work performed by our principal accountants.
Item 15.
Item 15. Exhibits and Reports on Form 8-K.
******
10.24
Agreement dated January 29, 2003 between XML - Global Technologies, Inc., Paradigm Group II, LLC and Paradigm Millennium Fund, LP governing a license to The Qube software
******
10.25
Promissory Note dated January 29, 2003 in the amount of $200,000 in favour of XML - Global Technologies, Inc.
******
10.26
Promissory note guaranty in favour of XML - Global Technologies, Inc.
******
10.27
Voting Agreement between XML - Global Technologies, Inc. and Paradigm Group II, LLC
******
10.28
General proxy of Paradigm Group II, LLC
******
10.29
OEM agreement dated January 29, 2003 between XML - Global Technologies, Inc., XFormity, Inc. and Paradigm Group II, LLC
*******
10.30
Mutual Specific Release dated April 21, 2003 between XML _ Global Technologies, Inc, Paradigm Group II, LLC and Paradigm Millennium Fund, LP releasing the parties from various obligations
*******
10.31
Supplemental Term Sheet dated April 9, 2003 from Paradigm Group II, LLC, offering to purchase stock from XML - Global Technologies, Inc.
*******
10.32
Notice of Termination by Information Builders, Inc. and iWay Software Company to XML - Global Technologies, Inc. in respect of a Software Licensing and Support Agreement dated June 14, 2002
*******
10.33
Agreement dated April 17, 2003 between Duane Nickull and Matt MacKenzie, doing business as "Yellow Dragon Software" and XML -Global Technologies, Inc. permitting Yellow Dragon to acquire certain intellectual property rights to GoXML Registry
*******
10.34
Agreement dated April 17, 2003 between Duane Nickull and Matt MacKenzie, doing business as "Yellow Dragon Software" and XML -Global Technologies, Inc. permitting Yellow Dragon to acquire certain intellectual property rights to GoXML Messaging
********
10.35
Employment agreement dated May 29, 2003 between Xtract Informatics Inc. and Garry Kupecz.
********
10.36
Agreement dated July 29, 2003 between Liang Wang, Kai Xu, Hai Bo Fan, Jianwen Zhang and XML Global Technologies, Inc. a Colorado company and it’s wholly owned subsidiaries.
********
10.37
Letter of intent dated June 30, 2003 between XML-Global Technologies, Inc. and Xenos Group Inc.
********
10.38
Definitive purchase and sale agreement dated August 21, 2003 between XML-Global Technologies, Inc. and Xenos Group Inc.
********
10.39
iWay Software, Inc. Termination Agreement and Mutual General Release.
********
10.40
Xtract Sale Agreement
********
10.41
Transfer Agreement dated April 14, 2003 with Developers
10.42
Grant of Right of First Option dated April 14, 2003 with Developers
********
10.43
Agreement dated July 4, 2003 with Developers
*********
10.44
Agreement and Plan of Merger dated as of August 13, 2004.
*********
10.45
Articles of Amendment to Articles of Incorporation
*********
10.46
Statement of Merger
*********
10.47
Closing Escrow Agreement dated as of September 27, 2004.
*********
10.48
B-50 Indemnity Agreement dated as of September 27, 2004
*********
10.49
Holdback Escrow Agreement dated as of September 27, 2004
*********
10.50
Indemnity Agreement by and among XFormity, Inc., Paradigm Group II, LLC and Paradigm Millennium Fund, L.P. dated as of September 27, 2004.
Indemnification of Directors and Officers
Our Articles of Incorporation provide that we shall indemnify, to the fullest extent permitted by Colorado law, any of our directors, officers, employees or agents who are made, or threatened to be made, a party to a proceeding by reason of the former or present official position of the person, which indemnity extends to any judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted. 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 Securities and Exchange Commission (the SEC or Commission), such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Our Articles of Incorporation limit the liability of our directors to the fullest extent permitted by the Colorado Business Corporation Act. Specifically, our directors will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for (i) any breach of the duty of loyalty to us or our stockholders, (ii) acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions of corporate assets that are in contravention of certain statutory or contractual restrictions, (iv) violations of certain laws, or (v) any transaction from which the director derives an improper personal benefit. The Articles do not limit liability under federal securities law.
Safe Harbour - Forward Looking Statements
When used in this Annual Report on Form 10-K, in documents incorporated herein and elsewhere by us from time to time, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements concerning our business operations, economic performance and financial condition, including in particular, our business strategy and means to implement the strategy, our objectives, the amount of future capital expenditures required, the likelihood of our success in developing and introducing new products and expanding the business, and the timing of the introduction of new and modified products or services. These forward looking statements are based on a number of assumptions and estimates which are inherently subject to significant risks and uncertainties, many of which are beyond our control and reflect future business decisions which are subject to change.
A variety of factors could cause actual results to differ materially from those expected in our forward-looking statements, including those set forth from time to time in our press releases and reports and other filings made with the Securities and Exchange Commission. We caution that such factors are not exclusive. Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release the results of any revisions of such forward-looking statements that may be made to reflect events or circumstances after the date hereof, or thereof, as the case may be, or to reflect the occurrence of unanticipated events.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
XFormity Technologies, Inc.
Date: October 13, 2010
/s/ Christopher Ball
Christopher Ball
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Christopher Ball
Christopher Ball
Chief Executive Officer and Director
October 13, 2010
/s/ C. Drew Seale
Chief Technical Officer and Director
October 13, 2010
C. Drew Seale
/s/ Jack Rabin
Chief Financial Officer and Director
October 13, 2010
Jack Rabin
/s/ Michael Shahsavari
Director
October 13, 2010
Michael Shahsavari
/s/ Paul Dwyer
Director
October 13, 2010
Paul Dwyer
/s/ Kenneth Johnson
Director
October 13, 2010
Kenneth Johnson
/s/ Farsheed Ferdowsi
Director
October 13, 2010
Farsheed Ferdowsi