Item 1. Business.
We believe that we are the market leader in next generation distributed predictive analytics (PA) enterprise software solutions. We have pioneered and commercialized a powerful, patented suite of advanced analytical solutions that direct decision making and improve corporate performance across the enterprise. We are targeting our solution to identify key anomalous and predictive trends within select market sub-subsectors including healthcare, financial services and public sectors which address significant ROI opportunities for our clients.
PA enterprise software solutions direct decision making by applying a combination of advanced analytics and decision optimization to an organization’s enterprise data, with the objective of improving business processes to meet specific organization goals. It accomplishes this through the application of algorithms that process historical data, “learn” what has happened in the past and create models that can be applied to make decisions about current or future cases. The PA solutions also identify “needles in a haystack” by identifying “clusters” of data with similar characteristics that are not easily identifiable by the end user.
Traditional business intelligence (BI) tools extract relevant data in a structured way, aggregate it and present it in formats such as dashboards and reports. BI tools are more exploratory than decision-oriented, helping businesses understand performance and trends, but generally not directing future actions or decisions based on what has been observed. Any attempts at using BI platforms to offer predictive insights are based on “deductive” technology (i.e. regression analysis), where “experts” create initial rules or hypotheses about the patterns and relationships that exist within the data based on their personal experience (i.e., who is a credit risk, what parameters create a potential risk, what medical indicators suggest a possible adverse drug reaction, etc.). Decisions based on a deductive technology approach however are only as good as the initial rules, hypotheses or data variables that directed the analysis.
By contrast, PA solutions are based on “inductive” technology. PA does not presume initial rules or hypotheses about patterns and relationships that could exist within the data. Rather, PA lets data lead the way and employs statistics, machine learning, neural computing, robotics, computational mathematics, and artificial intelligence techniques to explore all the data, instead of a narrow subset of it, to ferret out meaningful relationships and patterns. This approach allows PA to identify insights and relationships amongst different variables, particularly ones that are outside conventional thinking.
Our “next generation” PA solutions differentiate themselves from traditional PA solutions by operating in a distributed data environment. Instead of having to move data from different locations and servers into data warehouses to perform analysis, our next generation distributive PA solution brings the analysis directly to the data. Our distributed solution is patented and enhances analytical speed, data privacy and security while reducing cost.
We believe that as (1) data environments grow larger and more complex; (2) businesses attempt to incorporate unstructured data; including email and other text, into robust decision making algorithms; and (3) businesses demand that PA firms simplify the way predictive models are built and allow non-statisticians make sense and act upon the resulting analysis, our technology solutions are uniquely positioned to capitalize on these trends in the industry.
Corporate History
Our company was incorporated in Delaware in May 2005 under the name Black Nickel Acquisition Corporation I. From inception to October 2006, we were a “shell company” with no business or operations and only nominal assets. In October 2006, we acquired and merged with InferX Corporation, a Virginia corporation formed in 1992 (InferX Virginia), and succeeded to its business as our sole line of business. In connection with the merger, we changed our name to “InferX Corporation.”
InferX Virginia was formed in August 2006 by the merger of the former InferX Corporation, a Delaware corporation (InferX Delaware), with and into Datamat Systems Research, Inc., a Virginia corporation and an affiliate of InferX Delaware through common ownership (“Datamat”), pursuant to which Datamat was the surviving corporation and changed its name to “InferX Corporation.” Datamat was formed in 1992 as a professional services research and development firm, specializing in technology for distributed analysis of sensory data relating to airborne missile threats under contracts with the Missile Defense Agency and other Department of Defense (DoD) contracts. InferX Delaware was formed in 1999 to commercialize Datamat’s missile defense technology to build applications of real time predictive analytics. The original technology was developed in part with grants by the Missile Defense Agency.
We succeeded in 2004 by becoming the distributed PA solution for Lockheed Martin’s Missile Fire Control group. Lockheed Martin used our software while investigating different sensor phenomenology (everything a sensor can see) and how it affected that sensors ability to identify, target and destroy missiles and other types of munitions. Lockheed concluded that it was able to better identify missile targets by running a laser radar data through our software. After the Lockheed success, we continued to enhance our distributed PA capabilities on several similar R&D contract research opportunities for various government agencies.
We were part of a Northrop Grumman Corporation team led by its Integrated Systems Sector that had won an Air Force contract - Predictive Failures & Advanced Diagnostics for Legacy Aircraft (PFAD), to develop software that would better diagnose problems and predict failures in systems aboard legacy aircraft. The initial work was focused on the fighter, and specifically, on its radar system. Working with Northrop Grumman we applied our advanced data analysis and mining software to the Reliability and Maintainability Information System (REMIS), a USAF fleet-wide data warehouse storing all maintenance actions aircrafts for the last 20 years. The software was used to discover diagnostic knowledge, to extract new knowledge about a diagnostic system, and to predict diagnostic processes. Among various benefits, the use of our software contributed to better maintenance practices, and specifically to correct identification of costly “Cannot Duplicate” mission systems failures.
In 2005-2006, our software was used in a project with Care Guide (formerly PatientInfo Systems) for cost prediction in medical claims. Medical claims data was used to identify health plan enrollees who were at abnormally high risk for future medical costs. Early identification such as these can result in substantial future savings. The current model’s prediction accuracy was 40%. The effectiveness of our prediction resulted in 70% accuracy; which was well above the industry standard.
On October 27, 2009, we merged with The Irus Group, Inc., a company providing consulting services in the business intelligence (BI) market. The Irus Group specialized in the planning, implementation and development of complex BI and corporate performance management solutions for government, financial services, retail and healthcare clients. Since its founding in 1996, The Irus Group has conducted engagements for over 200 clients, including MasterCard, JP Morgan Chase, ConAgra, US Navy, US Army, US Air Force, and the Peace Corps. We initiated the merger both to obtain additional financial support in advance of the full roll out of our enterprise software solutions and to serve as a source of sales leads for our PA enterprise software product. We believe that our PA product suite has been enhanced with the BI expertise gained through the merger and is being offered through many of the legacy BI consulting relationships as a large scale enterprise solution for the three targeted verticals - health care, financial services and the public sector.
Market Opportunity
According to industry analyst IDC in their report released January 17, 2012, “the business analytics software market is on tap to hit $33.9 billion in 2012, up 8.2 percent from 2011. IBM CIO Study revealed: BI and Analytics are #1 Priority for business leaders in 2012.
IDC estimated the size of the advanced analytic software market at $1.5 billion in 2008, which is a subset of business analytics, representing a CAGR of 11.5% since 2005; the first year IDC identified advanced analytics as the emerging third market product cycle. IDC further estimates that the advanced analytics market will grow to $2.2 billion through 2012, representing a CAGR of 9.7% over that period.
(http://www.businessintelligence.info/docs/revistas/bispain_tendencias_business_intelligence.pdf - Sept. 18, 2009)
IDC defines the Advanced Analytic marketplace as including both (1) advanced BI applications with deductive technology; and (2) inductive PA applications, but does not break down their respective market sizes. InferX is focused exclusively on solutions in the latter, however does intend to sell its applications to BI providers as an enhancement for their existing platforms.
The Advanced Analytic marketplace is currently dominated by two companies, SAS and SPSS (an IBM company), which enjoyed market share in 2008 of 33% and 15%, respectively. The remainder of the market is fragmented with no one company controlling over 2% of the market.
We believe that the latest industry trends towards distributive analytics will drive its growth in the marketplace. We further believe that we have the unique advantage of having the sole proprietary patented solution to provide sophisticated PA across distributed data organizations to analyze and create decision based models using both structured and unstructured data.
Our Product Offerings
We target healthcare, financial services and public sector customers with (i) a full suite of PA enterprise software products and solutions; and (ii) comprehensive BI and corporate performance implementation, training and maintenance consulting services. Although our revenues are primarily from our consulting business, we believe that we will emerge as primarily a PA enterprise software firm.
Predictive Analytic Enterprise Software
Our PA enterprise software offerings are a common platform capable of supporting multiple discreet PA applications. The common platform, as discussed above, is our Distributed Data Analytics (D2A) tool enabling the real time analysis of complex, disparate and widely distributed data. Through our D2A platform we offer three distinct PA solutions that can be used individually or collaboratively to develop comprehensive decision based models for the enterprise: (i) InferAgent; (ii) InferText; and (iii) InferCluster.
InferAgent
InferAgent provides the customer with the power to access, analyze and perform PA on structured data from distributed relational database management system (RDBMS) databases, all without the need to move the data to a centralized data warehouse or worry about its format. The InferAgent PA process uses Modeling Agents, Collaboration Servers and Decision Agents to direct decision centric model construction and predictive insights.
Modeling Agent (MA) - The MA component is installed at the client site where it can access the individual database. It acts as the main component for knowledge discovery from that individual dataset by mining information and inferring decision rule models.
Collaborative Servers (CS) - The CS is the “special sauce” that enables the truly distributive capability. CS is the mediator between the various MAs, resulting in a set of global rules generated by the partial contribution of each MA.
Decision Agent (DA) - The DA component is also installed across individual datasets and uses the global model and rules developed through the interaction of the MAs and CS to generate predictive insights that guide decision actions at the individual location in response to newly acquired local data.
InferText
InferText provides the customer with the power to access, analyze and perform PA on unstructured data, including emails, blogs, written forms, etc., all without the need to move the data to a centralized data warehouse or worry about its format. At the core of the InferText product is the Concept Extractor subsystem that can extract key concepts from unstructured data sources that are of significance to the PA task at hand. InferText uses the same MA, CS and DA capabilities described above to direct decision centric model construction and predictive insights. InferText also works in tandem with InferAgent to provide decision rules and predictive insights based on both structured and unstructured data.
InferCluster
Unlike the collaborative interaction between InferAgent and InferText, InferCluster is a standalone component of our D2A platform designed to assign sets of observations into subsets (called clusters) so that observations in the same cluster are similar in some sense. In this task, InferCluster works with structured data from RDBMS databases, all without the need to move the data to a centralized data warehouse or worry about its format. The process of identifying clusters is similar to the MA, CS, DA process described above, with the exception that MAs are replaced with Cluster Agents (CA) which mine information from the individual database, communicate with the CS and create the clusters with a rule based representation. InferCluster is particularly well suited to fraud detection solutions, where identifying patterns among data outliers is important for success.
Solutions
We are able to market actionable PA solutions to potential customers based on our core product above. As we continue to execute on our business plan, we intend to further customize our core offerings into targeted applications designed to address specific sub-issues for healthcare, financial services and public sector customers.
Due to the current trends of hospitals implementing Electronic Health Records (EHR), our core product would offer a prospective tracking of core measures. We intend to work with EHR companies as add-on software to proactively analyze the data and predict the outcomes from the hospitals data. Using our core technology as a base, we are partnering with technology companies and academic institutions to create the following healthcare solutions:
·Our initial healthcare product offering is designed to enhance healthcare provider performance and reduce overall healthcare delivery costs. The solution correlates and assesses information from direct observation, practice patterns, aggregated analysis, patient outcomes, complaints and comparative performance measurements. Our offering will enhance healthcare delivery outcomes by expediting Ongoing Physicians Performance Evaluation (OPPE); a mandate created by The Joint Commission (TJC).
·Our second product offering in healthcare is in response to TJC and “Centers for Medicare and Medicaid Services (CMS) mandates which requires each hospital to submit core measures and other quality measures data, based on hospital competency in order to receive 100% payment. Non-participating hospitals will receive 2% reduction in payment. The system is capable of analyzing clinical data prospectively as the patients go through various stages of hospitalization.
·Our third product offering in healthcare is a web-based solution for acute kidney injury (AKI) to predict the risk score index for new patients coming into emergency rooms of hospitals and/or in acute care medical facilities.
·We are in discussions with an academic institution’s Cancer Research department where we have proposed InferX technology for analyzing clinical or research data (dispersed structured and unstructured data), while simultaneously providing tools to advance the knowledge and practice of Cancer Research. Our technology can provide solutions by using clustering and classification models. These may easily be utilized to solve those decision problems which arise frequently in clinical and research medicine. Traditional approaches in clinical or research medicine do not provide these overall capabilities; hence, we believe that our technology provides unique value.
The company is partnering with a technology company to solve the issue of “Audit Anomaly Detection”, using InferCluster as the core product, for the financial services sector:
·The typical auditing process ascertains whether the financial statements of a company conform to the generally accepted accounting principles (GAAP) and SEC guidelines. The sheer volume of accounting transactions reported by public companies is outpacing the auditor’s ability to analyze them.
·Our solution enhances the auditor’s current toolset by discovering Transactions of Interest (TOI) that could lead to the identification of compliance failures, fraud detection and material misstatements.
Business Intelligence and Corporate Performance Consulting
Our BI and corporate performance consulting services represent the legacy business gained through the merger with The Irus Group. We have been and are currently engaged in various consulting engagements across the public sector as well as with private sector healthcare and financial services clients. We have particular domain expertise in enterprise budgeting and planning, specifically assisting our clients to understand:
·Receivables and payables analysis
·Customer profitability
·Product profitability
·Regulatory compliance
·Expense management
·Cash flow analysis
Value Proposition
Our next generation PA technology offers a host of tangible, ancillary benefits to potential customers across its targeted healthcare, financial services and public sector verticals. We believe that the real value proposition for all customers is based upon our patented and proprietary D2A platform which differentiates us from traditional PA providers and second generation database competitors. We believe that our value proposition is manifested in three positive outcomes:
Complete Analysis
Our D2A platform allows PA analysis to be performed on all sources of relevant data, regardless of its location, format (structured or unstructured) or privacy/security constraints. This ability to bring to bear all relevant data for PA analysis provides for more complete decision rules and models when compared to competing PA solutions. Our platform allows the unique ability to identify “Known Knowns; Known Unknowns; and Unknown Unknowns”.
Faster Analysis
Speed of analysis depends in large part on the amount of data that must be moved to be processed by our PA application. We believe that our D2A platform is unique in that it brings the PA to the sources of data as opposed to traditional solutions which send data to the PA platform. This efficient distributive analytic process allows for “real time” data feeds to influence and direct dynamic “real time” decisions rules and models. While not all enterprises require real time capability, certain highly sensitive functions, such as border enforcement and credit card fraud prevention, require this type of speed in order to be effective.
Reduced Costs
Our next generation distributed PA system reduces or eliminates the need for a consolidated data warehouse, which typically accounts for 50% to 75% of traditional PA implementation costs, adds 6 to 9 months implementation time, and creates the need for additional and comprehensive on-going support.
Strategy
We believe that we are well-positioned to capitalize on industry trends to (i) exploit our proprietary distributive core competency; (ii) target complex and underserved sub-markets within the healthcare, financial services and public sectors with sophisticated solutions yielding large return on investment (ROI); and (iii) leverage InferX’s unique capability to provide added functionality and value to other companies’ solutions.
Exploit Proprietary Distributive Capability
While we have several PA solutions for our customer base, the primary advantage each solution shares is the ability to function in real time in a distributive data environment. We believe that industry leaders have begun to recognize that for reasons of efficiency, cost and security, PA needs to be brought to the data instead of the traditional method of moving data to the PA. While first generation PA providers, namely SAS and IBM SPSS have yet to address this issue, select second generation competitors in the marketplace (Teradata, Oracle, Netezza (an IBM company) are pursuing in-database analytics to address these concerns. All in-database solutions in practice have significant drawbacks, the most obvious being “Islands of PA” where an enterprise with multiple databases performing in-database analytics are unable to communicate with each other to provide a comprehensive, fully informed PA decision model. We have developed a truly distributed data platform where its PA solutions can simultaneously analyze data in multiple remote locations with disparate formats (structured and unstructured) without the need to move the data to a central data warehouse. We view this platform as the next generation of PA and intend to exploit this proprietary and patented competitive advantage in the marketplace.
Target Select Opportunities in Public Sector, Healthcare and Finance
Our distributive PA solutions have several core attributes versus traditional offerings, including (i) completeness and accuracy; (ii) speed; (iii) lowered costs; and (iv) privacy and security. While most PA providers have focused their energies and products on consumer oriented customer relationship management (CRM) solutions, we target sophisticated solutions toward select subsectors in the healthcare, financial services and public sectors to address Our next generation PA technology offers a host of tangible, ancillary benefits to potential customers across its targeted healthcare, financial services and public sector verticals. We believe that the real value proposition for all customers is based upon our patented and proprietary D2A platform which differentiates us from traditional PA providers and second generation database competitors. We believe that our value proposition is manifested in three positive outcomes:
Our D2A platform allows PA analysis to be performed on all sources of relevant data, regardless of its location, format (structured or unstructured) or privacy/security constraints. This ability to bring to bear all relevant data for PA analysis provides for more complete decision rules and models when compared to competing PA solutions. Our platform allows the unique ability to identify “Known Knowns; Known Unknowns; and Unknown Unknowns”.
Speed of analysis depends in large part on the amount of data that must be moved to be processed by our PA application. We believe that our D2A platform is unique in that it brings the PA to the sources of data as opposed to traditional solutions which send data to the PA platform. This efficient distributive analytic process allows for “real time” data feeds to influence and direct dynamic “real time” decisions rules and models. While not all enterprises require real time capability, certain highly sensitive functions, such as border enforcement and credit card fraud prevention, require this type of speed in order to be effective.
Our next generation distributed PA system reduces or eliminates the need for a consolidated data warehouse, which typically accounts for 50% to 75% of traditional PA implementation costs, adds 6 to 9 months implementation time, and creates the need for additional and comprehensive on-going support.
We believe that we are well-positioned to capitalize on industry trends to (i) exploit our proprietary distributive core competency; (ii) target complex and underserved sub-markets within the healthcare, financial services and public sectors with sophisticated solutions yielding large return on investment (ROI); and (iii) leverage InferX’s unique capability to provide added functionality and value to other companies’ solutions.
While we have several PA solutions for our customer base, the primary advantage each solution shares is the ability to function in real time in a distributive data environment. We believe that industry leaders have begun to recognize that for reasons of efficiency, cost and security, PA needs to be brought to the data instead of the traditional method of moving data to the PA. While first generation PA providers, namely SAS and IBM SPSS have yet to address this issue, select second generation competitors in the marketplace (Teradata, Oracle, Netezza (an IBM company) are pursuing in-database analytics to address these concerns. All in-database solutions in practice have significant drawbacks, the most obvious being “Islands of PA” where an enterprise with multiple databases performing in-database analytics are unable to communicate with each other to provide a comprehensive, fully informed PA decision model. We have developed a truly distributed data platform where its PA solutions can simultaneously analyze data in multiple remote locations with disparate formats (structured and unstructured) without the need to move the data to a central data warehouse. We view this platform as the next generation of PA and intend to exploit this proprietary and patented competitive advantage in the marketplace.
Our distributive PA solutions have several core attributes versus traditional offerings, including (i) completeness and accuracy; (ii) speed; (iii) lowered costs; and (iv) privacy and security. While most PA providers have focused their energies and products on consumer oriented customer relationship management (CRM) solutions, we target sophisticated solutions toward select subsectors in the healthcare, financial services and public sectors to address significant ROI opportunities. Our software has already been demonstrated or has applicability in the following:
Public sector
·Federal Communication Commission (FCC) - Detection of fraud (collusions) in spectrum auctions
·Department of the Navy - Prediction of aircraft readiness based on maintenance data
·Securities Exchange Commission (SEC) - Identification of fraudulent financial statements
Healthcare
·Major Health Provider Corporations Ongoing Physicians Performance Evaluation (OPPE)
·Veterans Affairs (VA) & National Institute of Health (NIH) - Identification of trauma patients propensity for kidney failure
Financial Services
·Major Accounting firms and the US Government - Fraud detection in financial transactions
·Leverage existing Business Intelligence client base
Patents and Trademarks
We developed our technology primarily under Small Business Innovative Research contracts with the federal government. These government contracts allowed us to retain ownership of the intellectual property. Our technology is protected by the following patents:
Patent
Information
Dates
Status
Knowledge Inferencing And Data Visualization Method And System (InferView)
U.S. Serial No.:
7,428,545
Filed July
Issued:
September 23, 2008
Issued
Distributed Data Mining And Compression Method And System (InferAgent)
US Patent No.:
7,308,436
Filed July 2003
Issued:
December 11,
Expires April
Issued
A hybrid Bayesian decision tree for classification
Full application
US Serial:
11/090,364
Filed March 25, 2005
Abandoned
Distributed Clustering Method (InferCluster)
Full application
US Serial:
11/904,982
Filed September 28, 2007
Patent Office asking for clarification. Preparing response.
A Distributed Method for Integrating Data Mining and Text Categorization Techniques (InferText)
Full application
US Serial:
11/904,674
Filed September 28, 2007
Pending
Supply Chain Risk Assessment Application
Full application
US Serial:
12/069,948
Filed February 2008
Pending
Competition
The market for our solutions is intensely competitive and is constantly changing. Our competitors vary in the size and scope of the products and services they offer. We encounter competition from a number of sources, including:
·Predictive modeling companies;
·CRM solutions providers;
·Business intelligence solutions providers; and
·Software companies supplying modeling, rules or analytic development tools.
Companies such as SAS; IBM SPSS; FICO; Angoss Software Corporation; Megaputer Intelligence, Inc.; and TIBCO Software Inc. (Insightful) offer stand-alone software systems that perform predictive analysis on single desktops and servers. InferAgent can operate on multiple, geographically-dispersed computers.
Oracle Corporation and Teradata provide “in-database analytics” analytical tools that only operate within their respective proprietary database products. InferAgent can operate with multiple databases, regardless of the underlying database format.
Companies such as Infoglide Software Corporation, Knowledge Computing Corporation (i2 Inc.), Exegy Inc. and Dulles Research, LLC, market software that can perform discovery over networks and distributed data sources. We believe that their software has no predictive analytic capabilities and generally provides only for discrete pattern matching, such as matching of names, phone numbers, IP addresses, etc.
·We believe our products offer the following advantages compared to our competition:
·Able to access and mine remote data
·Provide predictive analysis where many future risks and opportunities can be identified
·Work with multiple databases in different formats
·Integrate both structured and unstructured analysis
·Preserve the privacy of data
·Maintain the security and ownership of data
·Reduce or eliminate the need for creating data warehouses
·Provide near real time analysis and prediction
We believe access to additional data sources beyond those in a data warehouse provides a better basis for more accurate analysis and decision making. Also, we believe that the diminished need for a data warehouse will result in cost and time savings and reduce on-going support and maintenance expenses. Accordingly, we believe using our systems can result in a significant return on investment.
Sales and Marketing
We directly market and sell our products and services to businesses of many sizes and in many industries, government agencies and educational institutions. We also market, and sell our products through indirect channels. In the United States, our sales employees are based in our headquarters. Outside the United States, we sell and support our products through partners located in the local countries.
We manage our business and report our financial results based on the principal business segments described above. Our customers are organized by government and commercial customer groups, and sales are organized by direct and channel. Within the channel, we have various types of partners that we utilize for various customer groups. The partners include:
• Resellers that sell our products and services, frequently with their own value-added products or services, to targeted customer groups;
• Distribution partners that supply our solutions to smaller resellers with which we do not have direct relationships;
• Independent distributors that sell our products into geographies or customer segments in which we have little or no presence;
• Original equipment manufacturers ("OEMs") that integrate our products with their own hardware or software and sell the integrated products;
• Independent software vendors ("ISVs") that provide their clients with specialized software products, and often assist us in selling our products and services to clients purchasing their products;
• Systems integrators that provide various levels and kinds of expertise in designing and implementing custom IT solutions and often partner with our services business to extend their expertise or influence the sale of our products and services; and
• Advisory firms that provide various levels of management and IT consulting, including some systems integration work, and that typically partner with our services business on client solutions that require our unique products and services.
The mix of InferX's business by channel or direct sales differs substantially by business and region. We believe that customer buying patterns and different regional market conditions necessitate sales, marketing and distribution to be tailored accordingly. InferX is focused on driving the depth and breadth of its coverage in addition to efficiencies and productivity gains in both the direct and indirect business.
InferX's Sales organization manages most of our commercial and public sector customer relationships and also has primary responsibility for simplifying sales processes across our segments to improve speed and effectiveness of customer delivery. InferX Sales manages our direct distribution activities for commercial products and go-to-market activities with systems integrators and ISVs; as well as having responsibility for driving InferX's horizontal and vertical solutions with both InferX services business and the partners listed above.
Unique Value of InferX Technology in Clinical Research
We believe that we provide a unique capability to provide analysis of distributed data with hundreds of parameters which may be disparate or disjointed. The analyzed data itself may be either wholly structured or unstructured, or any combination of the two. We believe that this wide latitude in selecting data makes it ideal for use in clinical or patient research data. We use agent technology to obtain partial decisions from local information repositories. Therefore, only partial decisions are transferred between systems, not data. This allows scalability while preserving privacy and protecting sensitive information. Our technology can provide solutions by using clustering and classification models. These may easily be utilized to solve those decision problems which arise frequently in clinical and research medicine. Traditional approaches in clinical or research medicine do not provide these overall capabilities; hence, we believe that our technology is of unique value.
Research and Development
We have developed a companywide research and development plan which focuses on continued development and enhancement of the features and performance of our current products. We also have a detailed plan for the development of new product offerings. Three of our thirty eight employees devote at least a portion of their time to research and development activities. During the last two fiscal years, our employees devoted approximately 25% of their time to research and development activities. Historically, our research and development has been performed pursuant to government contracts under which we retained the intellectual property rights to the technology.
Employees
We have 9 nine employees: 9 full-time employees, 1 one of who devote at least a portion of their time to sales and marketing, one executive employee, and one administrative employee, one of our employees are is a members of management. To the best of our knowledge, we are in compliance with local prevailing wage, contractor licensing and insurance regulations. None of our employees is represented by any collective bargaining agreement, and our relationship with our employees is good.
Item 1A.
Item 1A. Risk Factors.
We operate in a rapidly changing economic and technological environment that presents numerous risks, many of which are driven by factors that we cannot control or predict. The following discussion, as well as our “Critical Accounting Policies and Estimates” discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations, highlights some of these risks. The risks described below are not exhaustive and you should carefully consider these risks and uncertainties and the information contained in this filing before investing in our securities. If any of these risks or uncertainties actually occurs, our business, financial condition or future operating results could be materially harmed. In that case, the price of our common stock could decline and you could lose part or all of your investment.
Risks Related to Our Operating Results and Business
We face intense competition.
Our business is rapidly evolving and intensely competitive, and is subject to changing technology, shifting user needs, and frequent introductions of new products and services. We have many competitors from different industries, including providers of online products and services. Our current and potential competitors range from large and established companies to emerging start-ups. Established companies have longer operating histories and more established relationships with customers and end users, and they can use their experience and resources against us in a variety of competitive ways, including by making acquisitions, investing aggressively in research and development, and competing aggressively for customers and market share. Emerging start-ups may be able to innovate and provide products and services faster than we can. If our competitors are more successful than we are in developing compelling products or in attracting and retaining clients, our revenues and growth rates could decline.
We may fail to achieve our financial forecasts due to inaccurate sales forecasts or other factors.
Our revenues, and particularly our new software license revenues and services revenues, are difficult to forecast, and, as a result, our quarterly operating results can fluctuate substantially. Our limited experience with managing our product business and forecasting its future financial results creates additional challenges with our forecasting processes. We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of all proposals and estimate when a customer will make a purchase decision and the dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. Our pipeline estimates can prove to be unreliable both in a particular quarter and over a longer period of time, in part because the “conversion rate” or “closure rate” of the pipeline into contracts can be very difficult to estimate. A contraction in the conversion rate, or in the pipeline itself, could cause us to plan or budget incorrectly and adversely affect our business or results of operations. In particular, a slowdown in IT spending or economic conditions generally can unexpectedly reduce the conversion rate in particular periods as purchasing decisions are delayed, reduced in amount or cancelled. The conversion rate can also be affected by the tendency of some of our customers to wait until the end of a fiscal period in the hope of obtaining more favorable terms, which can also impede our ability to negotiate, execute and deliver upon these contracts in a timely manner. In addition, for newly acquired companies, we have limited ability to predict how their pipelines will convert into sales or revenues for a number of quarters.
The market for our products and services is new and evolving and a viable market may never develop or may take longer to develop than we anticipate.
Our software and services represent what we believe is a novel entry in an emerging market, and we do not know the extent to which our targeted customers will want to purchase them. The development of a viable market for our products may be impacted by many factors which are out of our control, including customer reluctance to try new products and services and the existence and emergence of products and services marketed by better-known competitors.
If a viable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop our products and services and may be unable to achieve profitability.
If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive, and our revenues and operating results could suffer.
Our success depends on providing products and services that make using our technology a more useful and business impactful experience for our customers. Our competitors are constantly developing innovations in technology embedded in their products and services. As a result, we must continue to invest significant resources in research and development in order to enhance our predictive analytics technology and our existing products and services and introduce new products and services solutions that people can easily and effectively use. If we are unable to provide quality products and services, then our users may become dissatisfied and move to a competitor’s products and services. In addition, these new products and services may present new and difficult technology challenges, and our operating results would also suffer if our innovations are not responsive to the needs of our users and or are not effectively brought to market. This may force us to compete in different ways and expend significant resources in order to remain competitive.
The industry in which we operate is characterized by rapid technological changes, and our continued success will depend upon our ability to react to such changes.
The markets for our products and services are characterized by rapidly changing technology. The introduction of products or services embodying new technology can render our existing products and services obsolete and unmarketable and can exert price pressures on existing products and services. It is critical to our success for us to be able to anticipate changes in technology and to successfully develop and introduce new, enhanced and competitive products and services on a timely basis. We cannot assure you that we will successfully develop new products or services or introduce new applications for existing products and services, that new products and applications will achieve market acceptance or that the introduction of new products, services or technological developments by others will not render our products and services obsolete. Our inability to develop products and services that are competitive in technology and price and meet customer needs could have a material adverse effect on our business, financial condition or results of operations.
Our management controls a substantial percentage of our stock and therefore has the ability to exercise substantial control over our affairs.
As of the date of this filing, our directors and executive officers beneficially owned 13,910,457 shares, or approximately 21.1%, of our outstanding common stock in the aggregate. Because of the large percentage of stock held by our directors and executive officers, these persons could influence the outcome of any matter submitted to a vote of our stockholders.
If we were to lose the services of key members of the Board of Directors, or other members of our senior management team, we may not be able to execute our business strategy.
Our future success depends in a large part upon the continued service of key members of our senior management team. In particular, losses of our critical key executive management could have a material adverse effect on the InferX Corporation as well as the development of our technology, our business prospects, our potential earning capacity, our culture, and our strategic direction. The loss of or unavailability of the services of any one of these individuals would have a material adverse effect on our business prospects and/or potential earning capacity.
We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel, hire qualified personnel, or maintain our corporate culture, we may not be able to grow effectively.
Our performance largely depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense, and some of our competitors have directly targeted our employees. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
In addition, we believe that our corporate culture fosters innovation, creativity, and teamwork. As our organization grows, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our future success.
We may not be able to protect important intellectual property, and we could incur substantial costs defending against claims that our products infringe on the proprietary rights of others.
We rely on copyright, trademark, patent and trade secret laws, confidentiality procedures, controls and contractual commitments to protect our intellectual property rights. Despite our efforts, these protections may be limited. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise obtain and use our intellectual property. Any patents owned by us may be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope of the claims we seek, if at all. We currently have received two patents and have filed four provisional patents, awaiting determination. While we believe that we have a proprietary position in component technologies for our products, our ability to compete effectively will depend, in part, on our ability to protect our proprietary technologies, processes and designs, to secure patents for the applications we have pending and to protect those patents that we may secure. We do not know whether any of our pending patent applications will be issued or, if issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes. Even if all of our patent applications are issued and are sufficiently broad, our patents may be challenged or invalidated.
We could incur substantial costs in prosecuting or defending patent infringement suits or otherwise protecting our intellectual property rights. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so. If we cannot protect our intellectual property rights against unauthorized copying or use, or other misappropriation, we may not remain competitive.
We may face liability claims from future customers if our software malfunctions or contains undetected defects.
Our products have in the past contained, and may in the future contain, undetected or unresolved errors when first introduced, as new versions are released, or otherwise. Despite extensive testing, errors, defects or failures may be found in our current or future products or enhancements after they have been installed by customers. If this happens, we may experience delay in or loss of market acceptance and sales, diversion of development resources, injury to our reputation or increased service costs, any of which could have a material adverse effect on our business, financial condition and results of operations. Moreover, because our products are designed to provide critical data analysis services, we may receive significant liability claims. Although we intend to obtain product liability insurance covering certain damages arising from implementation and use of our products, our insurance may not cover all claims sought against us. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any such claims, whether or not successful, could seriously damage our reputation and business.
We must ensure the protection and privacy of customer data.
We rely on complex encryption algorithms and technology to secure customer data. We believe our products protect the security and privacy of customer data by transmitting encrypted pointers to customer data, rather than the data itself, across the Internet and existing dedicated transmission lines. However, if customer data is misappropriated or unintentionally disclosed as a result of an actual or perceived failure of our software, our reputation, and ultimately our business, would be seriously harmed, and we could face liability claims.
We currently are dependent on contracts with the federal government for all of our current revenues. Our sales to government clients subject us to risks including early termination, audits, investigations, sanctions and penalties.
We derive revenues from contracts with the U.S. government, state and local governments and their respective agencies, which may terminate most of these contracts at any time, without cause. There is increased pressure for governments and their agencies, to reduce spending. Our federal government contracts are subject to the approval of appropriations being made by the U.S. Congress to fund the expenditures under these contracts. Similarly, our contracts at the state and local levels are subject to government funding authorizations. Additionally, government contracts are generally subject to audits and investigations which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business.
Revenues derived from federal government contracts accounted for 97% of our revenues in fiscal 2011. We expect that government contracts will continue to be a significant source of our revenues for the foreseeable future. Our business generated from government contracts may be adversely affected if:
·levels of government expenditures and authorizations for national and homeland security related programs decrease, remain constant or shift to programs in areas where we do not provide products and services;
·we are prevented from entering into new government contracts or extending existing government contracts based on violations or suspected violations of procurement laws or regulations;
·we are not granted security clearances that are required to sell our products or services or such security clearances are revoked; or
·our reputation or relationship with government agencies is impaired.
If we fail to comply with complex procurement laws and regulations, we may be subject to civil and criminal penalties and administrative sanctions.
We must comply with laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how we do business with government agencies and may impose added costs on our business. For example, we are subject to the Federal Acquisition Regulations, which comprehensively regulate the formation, administration and performance of federal government contracts, and to the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with contract negotiations.
If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with government agencies, which could materially and adversely affect our business, financial condition and results of operations. In addition, a government may reform its procurement practices or adopt new contracting rules and regulations that could be costly to satisfy or that could impair our ability to obtain new contracts.
Risks Related to Our Common Stock
Currently, there is a limited trading market for our common stock, which may adversely impact your ability to sell your shares and the price you receive.
There is currently a limited trading market for our common stock and a more active trading market for our common stock may never develop or be sustained. The market price of our common stock may be significantly affected by factors such as actual or anticipated fluctuations in our operating results, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the shares of developmental stage companies, which may materially adversely affect the market price of our common stock without regard to our operating performance. These fluctuations may also cause short sellers to enter the market from time to time in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time. Furthermore, for companies such as us whose securities are quoted on the OTC Bulletin Board, it is more difficult (i) to obtain accurate quotations, (ii) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (iii) to obtain needed capital. These factors may negatively impact your ability to sell shares of our common stock and the price you receive.
Our common stock is deemed to be a “penny stock,” which may make it more difficult for you to sell your shares.
Our common stock is subject to the “penny stock” rules adopted under Section 15(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or another national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. Remaining subject to the penny stock rules should be expected to have an adverse effect on the market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
We need to raise additional capital, but that capital may not be available.
Our existing capital is insufficient to fund our operations beyond the second quarter of 2012. We believe the anticipated revenues from potential customer contracts along with the sale of a limited amount of equity will enable us to meet our financial obligations as they become due. However, we are not generating sufficient revenues to increase our working capital or to carry out our proposed business objectives and continue to operate as a going concern beyond the near term, and we need to obtain additional financing or reduce our expenses by curtailing our operations.
We cannot assure you that we will be successful or that our operations will generate sufficient revenues, if any, to meet the expenses of our operations. Although we are seeking additional financing, such financing may not be available or, if available, may not be available on satisfactory terms. Additionally, the nature of our business activities may require the availability of additional funds in the future due to more rapid growth than is forecast, and thus, we may need additional capital or credit lines to continue that rate of business growth. We may encounter difficulty in obtaining these funds and/or credit lines. Moreover, even if additional financing or credit lines were to become available, it is possible that the cost of such funds or credit would be high and possibly prohibitive.
If we were to decide to obtain such additional funds by equity financing in one or more private or public offerings, current stockholders would experience a corresponding decrease in their percentage ownership.
Our independent registered public accounting firm has expressed substantial doubt regarding our ability to continue as a going concern.
Our audited financial statements for the years ended December 31, 2011 and 2010 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firms have issued their reports dated December __, 2012 and April 13, 2011 in connection with the audits of our financial statements for the years ended December 31, 2011 and 2010 that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern due to our having sustained operating losses and capital deficits from operations. The fact that we have received this “going concern opinion” from our independent registered public accounting firm will likely make it more difficult for us to raise capital on favorable terms and could hinder, to some extent, our operations. Additionally, if we are not able to continue as a going concern, it is likely that stockholders will lose all of their investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Item 1B.
Item 1B. Unresolved Staff Comments.
The Company has received no written comments from the SEC staff regarding its periodic or current reports as filed under the Securities Exchange Act of 1934, nor on any filings made pursuant to the Securities Act of 1933, that remain unaddressed or unresolved as of the filing date of this Report.
Item 2.
Item 2. Description of Property.
We lease approximately 3,200 square feet of office space at 46950 Jennings Farm Drive, Suite 290, Sterling, Virginia pursuant to a lease which is currently month to month. Our lease provides for an annual rental of approximately $78,000, which is subject to annual escalations of 3.5%. The space can house approximately 20 to 23 staff. We believe that our facilities are currently adequate for our needs and that additional space is readily available should we need it.
Item 3.
Item 3. Legal Proceedings.
Arnold Worldwide, Inc., the landlord of InferX at its former premises at 1600 International Drive, Suite 110, McLean, Virginia 22102, commenced an action against InferX in the General District Court of Fairfax County, on August 25, 2008, seeking (i) damages, including rent due under the sublease between InferX and Arnold Worldwide, late fees due under the sublease, attorney’s fees due under the sublease, and interest, for a total amount claimed of $180,066.53; and (ii) an order for possession of the Premises. Though the Company disputes the amount outstanding, it has made a good faith gesture to resolve this matter by making a payment of $30,000 on September 12, 2008, and entered into good-faith discussions to resolve the issue with Arnold Worldwide. The Company agreed to the entry of a Consent Order of Possession that allowed Arnold Worldwide to take possession of the premises. The lease for the premises at 1600 International Drive terminated November 30, 2008.
PCT Law Group, PLLC, a legal law firm who that represented InferX Corporation in certain matters concerning intellectual property and patent application matters, commenced an action against InferX Corporation in the General District Court, Fairfax County, Virginia on March 26, 2012; seeking unpaid legal fees of $10,419.59. The Company received a Garnishment Summons dated November 14, 2012 from the Court of Fairfax County, Virginia for the unpaid amount plus interest, judgment costs, and attorney fees for a total of $16,883.69. Although the Company disputes the amount outstanding, the Company we are in negotiations with PCT Law Group, PLLC for to settle this litigation.
Fairchild Consultants, LLC, d/b/a Global Services a marketing support consulting services firm which represented InferX Corporation in matters for government regulatory contract filing matters, commenced an action against InferX Corporation in the Superior Court of Washington, DC, on October 13, 2012, seeking unpaid general consulting services fees in the amount of $9,900. Although the Company disputes the amount outstanding, the Company we are in negotiations with Fairchild Consultants, LLC for resolution to and settlement this litigation.
Item 4.
Item 4. Mine Safety Disclosures.
None.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.
Market Information
Transactions in our common stock are presently quoted the OTC Bulletin Board under the symbol “NFRX”. Quotation of transaction in our common stock commenced on December 5, 2007.
The closing bid prices for our common stock for the period from December 31, 2010 through December 31, 2011, are reported by OTC Markets Inc. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Holders
As of December 13, 2012, there were 91 record stockholders of 65,793,713 issued and outstanding shares of our common stock.
Dividends
We do not intend to pay cash dividends on our common stock for the foreseeable future, but currently intend to retain any future earnings to fund the development and growth of our business. The payment of dividends if any, on the common stock will rest solely within the discretion of the Board of Directors and will depend, among other things, upon our earnings, capital requirements, financial condition, and other relevant factors. We have not paid or declared any dividends upon our common stock since inception.
Item 6.
Item 6. Selected Financial Data.
The following table sets forth selected financial data as of and for the last three fiscal years. This selected financial data should be read in conjunction with the consolidated financial statements and related notes included in Item 15 of this Annual Report.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information set forth and discussed in this Management’s Discussion and Analysis or Plan of Operation is derived from our financial statements and the related notes, which are included. The following information and discussion should be read in conjunction with those financial statements and notes, as well as the information provided in our Annual Report on Form 10-K for our fiscal year ended December 31, 2011.
Overview
InferX is a leading provider of next generation Predictive Analytics and Business Intelligence solutions for financial services, healthcare, and government enterprises. Our solutions include a wide variety of innovative technologies that provide critical results for challenges such as healthcare fraud mitigation, financial services risk management and complex intelligence analysis, to name a few. We have pioneered and commercialized a suite of powerful patented technologies for advanced analytical solutions that direct decision making and improve corporate performance across the entire enterprise. Our solutions are targeted towards select sub-subsectors within the healthcare, financial services and public sector markets to address significant ROI opportunities for our clients. Through broad, diversified market adoption of our predictive data analytical solutions, InferX plays a critical role in promoting the safety and security of our nation's assets and its citizens, while also empowering commercial enterprises with the knowledge and material insight necessary to maximize profits.
Predictive analytics helps organizations make better decisions by providing empirical, objective and consistent method of evaluating transactions, customers, or shippers in this context - and doing it at high volumes using disparate and geographically dispersed enterprise databases. These models are often "behavioral" because they may be used to predict future behavior of account or customer actions in regard to; e.g. likelihood of fraudulent behavior. By enabling organizations to instantly differentiate between desirable and undesirable business, predictive models allow them to control the level of risk they are willing to assume and actions to increase profitability. Our patented and patent-pending products simultaneously analyze data in multiple remote locations with disparate formats without the need to move the data to a central data warehouse, thereby preserving the privacy and security of the data.
Since inception, InferX has evolved from a leading technical, database research and development firm to its current position as a developer of the next generation predictive analytics technology. InferX and its predecessor Datamat Systems Research, Inc. have been in business since 1992, originally as a professional services research and development firm, specializing in technology for distributed analysis of sensory data relating to airborne missile threats under contracts with the Missile Defense Agency (MDA) and other Department of Defense (DoD) contracts. InferX Delaware was formed in 1999 to commercialize Datamat's missile defense technology to build applications of real time predictive analytics. InferX and Datamat were merged together in August 2006. In October 2006 InferX became public by completing a "reverse merger" with Black Nickel Acquisition Corp. which was a fully reporting "shell company".
On March 16, 2009, InferX entered into an agreement and plan of reorganization (the “Merger Agreement”) with the Irus Group, Inc. to effect a reverse triangular merger between The Irus Group, Inc. and the Company’s wholly-owned subsidiary, Irus Acquisition Corp. (formed for the purpose of completing this transaction). The Merger Agreement was then amended on June 15, 2009 (the “First Amended and Restated Agreement”) to reflect the change in the amount of the issued shares to Irus in the transaction. Under the terms of the First Amended and Restated Agreement, the issued and outstanding shares of The Irus Group common stock was automatically converted into the right to receive 56% of the issued and outstanding shares of the Company’s common stock. On October 28, 2009 the merger was completed.
The Irus Group, Inc., founded in 1996, has emerged as a star consulting firm specializing in bridging corporate performance management and business intelligence systems to help clients answer tough business questions. Irus’ specific domain expertise revolved around the planning, consulting, implementation and development of complex business intelligence solutions. The Irus Group developed a deep understanding and breadth of knowledge in enterprise budgeting and planning systems, allowing Irus to provide their customers marry critical systems and processes for business intelligence into corporate performance management solutions.
Irus’ strategic approach, coupled with broad business understanding, and proven processes, tied to technical proficiency in major business intelligence, corporate performance management, and budgeting and planning applications, help improve client business performance. Notably, Irus provided clients comprehensive support for their financial and operational management processes, which included: capture of critical business functional requirements; strategic planning for future growth and expansion; systems development and implementation; and training. Irus successfully implemented projects across a broad cross-section of clients in the United States and Canada, which have included government, financial services, retail, manufacturing, and telecommunications.
Historically, we have derived nearly all of our sales revenues under federal government contracts. Under these contracts, we performed several critical tasks, including research and development and professional services consulting. Through terms of the contracts with our customers, we were able to retain ownership of the intellectual property associated with R&D efforts; which ultimately led to the creation of our current products. In fiscal 2002, faced with the prospect of continuing to receive relatively small and uncertain margins associated with fixed price government contracts, and the inherent limit of the market size, we began to further develop our software as a commercial product, concentrating on building specific applications that we believed would meet the growing needs of our potential new customers. In fiscal 2003, we sold our first commercial licenses and, since fiscal 2004, all of our revenues have derived from government contracts.
The InferX Corporation continues to enjoy a solid performance record for quality and on-time performance with our US Government clients. Our services business consists of professional IT consulting focused on business intelligence and corporate performance management and predictive analytics support. As a result of our merger with the Irus Group, we expanded and enhanced our customer base and services offerings, which we believe will increase our revenues and expenses in comparison to recent periods. Our services business, which represented over 100% and 99% of our total revenues in fiscal 2011 and 2010, respectively, has significantly lower margins than our software business. The proportion of our services revenues relative to our total revenues in fiscal 2011 was affected by our continued focus on the PA software side of the business and the continued uncertainty of the US Government budget.
Consulting: Our consulting line of business is comprised of two operating segments: (i) providing services to our customers in support of their corporate enterprise predictive and advanced analytics requirements; and (ii) provides services to BI customers in enterprise architecture design and implementation; business / IT strategy alignment; business process simplification; solution integration; and product implementation, enhancements, and upgrades. Our consulting revenues are dependent upon general economic conditions and the level of product revenues, including the new software license sales of our application products. To the extent we are able to grow our software products revenues; we would also generally expect to be able to grow our consulting revenues.
Software Business: Our software business, which represented 0% and 1%, of our total revenues in fiscal 2011 and 2010 respectively, is comprised of two operating segments: (i) new software licenses and (ii) software license updates and product support. The company made significant investment in developing new healthcare and financial services solutions working with partners as addressed in business section. We expect that our software business’ total revenues in 2011 will increase due to the continued demand for our PA software products and software license updates and product support offerings. InferX will continue to make further investments in R&D to meet customer demand and changing market conditions. Future software revenues will significantly increase, as we bring to market our software-as-a-service (SaaS) and platform-as-a-service (PaaS) delivery models.
During fiscal year 2011, the Company continue to place great emphasis on the enhancement and development of our core technology products and the adaptation into market-sector specific solutions. This concentration of effort resulted in much higher overhead, on a year over year basis, consisting primarily of personnel related expenditures. Key to our future, we intend to continue to invest significantly in our product research and development and market-driven technology solutions because they are essential to maintaining our competitive position.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We rely on historical experience and on other assumptions we believe to be reasonable under the circumstances in making our judgments and estimates. Actual results could differ from those estimates. We consider our critical accounting policies to be those that are complex and those that require significant judgments and estimates, including the following: recognition of revenue, capitalization of software development costs and income taxes.
Principles of Consolidation
The consolidated financial statements include those of InferX Corporation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid debt instruments and other short-term investments with a maturity of six months or less, when purchased, to be cash equivalents.
We maintain cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit Insurance Corporation up to $250,000.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables as well as historical collection information. Credit is granted to substantially all customers on an unsecured basis. In determining the amount of the allowance, management is required to make certain estimates and assumptions.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets (primarily three to five years). Costs of maintenance and repairs are charged to expense as incurred.
Computer Software Development Costs
The Company capitalized certain software development costs. The Company capitalizes the cost of software in accordance with ASC 985-20 once technological feasibility has been demonstrated, as the Company has in the past sold, leased or otherwise marketed their software, and plans on doing so in the future. The Company capitalizes costs incurred to develop and market their privacy preserving software during the development process, including payroll costs for employees who are directly associated with the development process and services performed by consultants. Amortization of such costs is based on the greater of (i) the ratio of current gross revenues to the sum of current and anticipated gross revenues, or (ii) the straight-line method over the remaining economic life of the software, typically five years. It is possible that those anticipated gross revenues, the remaining economic life of the products, or both, may be reduced as a result of future events. The Company has not developed any software for internal use.
Recoverability of Long-Lived Assets
We review the recoverability of our long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on our ability to recover the carrying value of long-lived assets from expected future cash flows from operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale are carried at the lower of the then current carrying value or fair value less estimated costs to sell.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. We enter into certain arrangements where we are obligated to deliver multiple products and / or services (multiple elements). In these transactions, we allocate the total revenue among the elements based on the sales price of each element when sold separately (vendor-specific objective evidence). The Company generates revenue from application license sales, application maintenance and support, professional services rendered to customers as well as from application management support contracts with commercial and governmental units. The Company’s revenue is generated under time-and-material contracts and fixed-price contracts.
The Company’s business is not seasonal in nature. The timing of contract awards, the availability of funding from the customer, the incurrence of contract costs and unit deliveries are the primary drivers of our revenue recognition. These factors are influenced by the federal government’s October-to-September fiscal year. This process has historically resulted in higher revenues in the latter half of the government fiscal year. Many of our government customers schedule deliveries toward the end of the calendar year, resulting in increasing revenues and earnings over the course of the year.
The Company does not derive revenue from projects involving multiple revenue-generating activities. If a contract would involve the provision of multiple service elements, total estimated contract revenue would be allocated to each element based on the fair value of each element. The amount of revenue allocated to each element would then be limited to the amount that is not contingent upon the delivery of another element in the future. Revenue for each element would then be recognized depending upon whether the contract is a time-and-materials contract or a fixed-price, fixed-time contract.
Stock-Based Compensation
In 2006, we adopted the provisions of ASC 718-10 “Share-Based Payments” (ASC 718-10) which requires recognition of stock-based compensation expense for all share-based payments based on fair value. Share-based payment transactions within the scope of ASC 718-10 include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. This adoption had no effect on the Company’s operations. Prior to January 1, 2006, we measured compensation expense for all of our share-based compensation using the intrinsic value method.
We have elected to use the modified-prospective approach method. Under that transition method, the calculated expense in 2006 is equivalent to compensation expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values. We recognize these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. We consider voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.
We measure compensation expense for non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital. For common stock issuances to non-employees that are fully vested and are for future periods, we classify these issuances as prepaid expenses and expense the prepaid expenses over the service period. At no time have we issued common stock for a period that exceeds one year.
Fair Value of Financial Instruments (other than Derivative Financial Instruments)
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. For the notes payable, the carrying amount reported is based upon the incremental borrowing rates otherwise available to us for similar borrowings. For the warrants that are classified as derivatives, fair values were calculated at net present value using our weighted average borrowing rate for debt instruments without conversion features applied to total future cash flows of the instruments.
Convertible Instruments
We review the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the embedded conversion feature. Generally, embedded conversion features, where the ability to physical or net-share settle the conversion option is not within our control, are bifurcated and accounted for as a derivative financial instrument. Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the debt instrument. The resulting discount to the face value of the debt instrument is amortized through periodic charges to interest expense using the Effective Interest Method.
Income Taxes
Under ASC 740 the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Research and Development
Research and development expenses include payroll, employee benefits, equity compensation, and other headcount-related costs associated with product development. The Company has determined that technological feasibility for the software products is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, the Company expenses all research and development costs when incurred.
Recent Issued Accounting Standards
In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. FASB ASU 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820 resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.
In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective for the Company beginning October 1, 2012, with early adoption permitted. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.
In September 2011, FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amended goodwill impairment guidance to provide an option for entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the Company’s results of operations, cash flows or financial position.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Other ASU’s that have been issued or proposed by the FASB ASC that do not require adoption until a future date and are not expected to have a material impact on the financial statements upon adoption.
Years Ended December 31, 2011 and 2010
Revenue: Our revenue for the year ended December 31, 2011 was $3,395,002, a decrease from $4 712,299 for the same period in 2010. For the year ended December 31, 2011, our total revenue decreased by 28% on a year-over-year basis, reflecting what we believe to be an uncertain economic environment across all of our focus market areas; and continued instability of the US Government to enact a budget, which directly impacts our revenue delivered from government contracts. From a customer market perspective, we did not see a significant improvement in the business environment for capital expenditures across our enterprise, commercial, and government markets, during the year ended December 31, 2011. In 2011, our revenue from professional services contracts decreased by 28% compared with the corresponding periods of 2010. In the 2011 and 2010, we had $0 and $24,000, respectively revenue from core PA technology products.
Cost of Revenues: The costs of revenues for the year ended December 31, 2011 were $ 2,352,409, a 44% decrease from $ 4,189,596 for the same period in 2010. The decrease resulted primarily from lower direct and subcontractor labor costs attributable to lower revenue and limited new contracts during the period.
Gross Margin: In the year ended December 31, 2011, our gross margin percentage increased by approximately 99% compared with the corresponding period of 2010. This increase in gross margin percentage was the result of a significant decline in overall cost of goods sold for our service delivery directly impacting our gross margin; and the conversion of several of the government contracts to fixed fee delivery contracts.
Operating Expenses: For the year ended December 31, 2011, operating expenses increased by approximately 35% from the corresponding period of 2010. The increase was attributable to a significant increase of headcount-related expenses, including variable compensation expenses (i.e. stock based), and control of our discretionary expenses, cost of investment services, and increase in non-revenue based consulting services. Operating expenses for the twelve months ended December 31, 2011, which include indirect labor, professional fees, travel, rent, general and administrative, stock issued for services, stock based compensation, and depreciation, increased $ 679,737 to $ 2,637,086 from $ 1,957,349 for the same period in 2010. Depreciation decreased by $8,455 as additional fixed assets became fully depreciated and the addition of one new fixed asset was acquired during the year ending December 31, 2011 from the same period in 2010.
Other Income (Expense): Other income increased $39,394,815 in the year ended December 31, 2011 compared to the same period in 2010. Three main factors affected this income increase (expense decrease): (i) Decrease in the expense associated with the amortization of debt discount of $129,354; (ii) a loss incurred through reevaluation and extinguishment of debt of $16,164; and (iii) a loss incurred through the fair value adjustment on derivative liability of $39,506,510. During the year ending December 31, 2011 the Company had an increase in interest expense of $1,495 from the same period in 2010.
Factors That May Impact Net Sales and Gross Margin
Product sales may continue to be affected by multiple factors, including the continuing slow recovery of the national business economic posture, challenges in federal government contracting and related market uncertainty, which have resulted in reduced or cautious spending in our enterprise, commercial and government markets; changes in the national economic conditions; competition, including price-focused competitors; new product introductions; sales cycles and product implementation cycles; changes in the mix of our customers between government and commercial markets; changes in the mix of direct sales and indirect sales; variations in sales channels; and final acceptance criteria of the product, system, or solution as specified by the customer. For additional factors that may impact net product sales, see “Part II, Item 1A Risk Factors.” Product gross margin may be adversely affected in the future by changes in the mix of products sold, including further periods of increased growth of some of our lower margin products; introduction of new products, changes in distribution channels; price competition, the timing of revenue recognition; sales discounts; increases in material or labor costs; warranty costs; and the extent to which we successfully execute on our strategy and operating plans. Service gross margin may be impacted by various factors such as the change in mix between technical support services and advanced services, the timing of technical support service contract initiations and renewals, and the timing of our strategic investments in headcount and resources to support this business.
Liquidity and Capital Resources
We had cash of $152,874 at December 31, 2011 and a working capital deficit of $44,149,421 as of December 31, 2011. The Company’s cash flows decreased $12,958 in 2011, solely due to the cash loss of $174,974 from operating activities and the cash gain of $428,362 from financing activities; with almost 85% of the cash derived coming from the issuance of the Series B Preferred offerings. The Company’s cashflows from investing activities decreased $133,612 during the year ending December 31, 2011.
We will need to generate significant additional revenue to support our projected increases in staffing and other operating expenses in light of the requirements created by our business plan and enhancement of our core technology products and the adaptation of that technology into market-sector specific solutions. We are currently expending approximately $292,000 per month to support our operations, and under our current business plan we anticipate expenditures of approximately $262,000 per month through the 4th quarter of 2012. We expect to raise additional financing through the sale of our common stock during the second or third quarter of 2012 to supplement the cash generated from software license sales and the professional services that are provided through existing contracts that we believe will be sufficient to fund our operations until additional financing is procured If we are unable to generate sufficient cash through the sale of our stock it will be necessary for us to significantly reduce expenses to manage our business. Although we believe the additional capital required will be provided through one of these sources, we cannot assure you that we will be successful in these financing efforts or accepting financing at acceptable prices. Our failure to generate such revenue, reduce expenses or obtain necessary financing could impair our ability to continue business operations and raises substantial doubt about our ability to remain as a going concern.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information required by this item appears following Item 15 of this report and is incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A(T).
Item 9A(T). Controls and Procedures.
Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2011. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are not effective due to the existence of material weaknesses in our internal control over financial reporting, discussed below.
Management’s Report on Internal Control Over Financial Reporting.
Internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and in consultation with our board of directors, has established and maintained policies and procedures designed to maintain the adequacy of our internal control over financial reporting that it believes are appropriate in light of our limited activities, personnel and resources as a development stage company, and includes those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and dispositions of our assets;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the criteria established in a report entitled Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment, management has concluded that our internal controls over financial reporting were not effective as of December 31, 2011 due to the existence of several material weaknesses in our internal control over financial reporting, discussed below. Our Board of Directors has reviewed the results of management’s assessment. In addition, on a quarterly basis we will evaluate any changes to our internal control over financial reporting to determine if material changes occurred.
Material Weaknesses in Internal Controls
During the conduct of our assessment of internal control over financial reporting, we identified two material weaknesses and have advised the Board of Directors that the following material weaknesses existed at December 31, 2011. As defined by the Public Company Accounting Oversight Board Auditing Standard No. 5, a “material weakness” is a control deficiency or a combination of control deficiencies such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses exist in (i) the lack of independent oversight by an audit committee of independent members of the Board of Directors and (ii) the lack of segregation of duties in the financial reporting and compliance functions. Due to the lack of resources, we have not taken any substantial steps towards resolving the material weaknesses described above.
While these material weaknesses did not have an effect on our reported results or result in the restatement of any previously issued financial statements or any other related disclosure, they nevertheless constituted deficiencies in our controls. In light of these material weaknesses and the requirements enacted by the Sarbanes-Oxley Act of 2002, and the related rules and regulations adopted by the SEC, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2011, our controls and procedures needed improvement and were not effective at a reasonable assurance level. Despite those deficiencies in our internal controls, management believes that there were no material inaccuracies or omissions of material fact in this annual report.
The elimination of the material weaknesses identified above will be among our highest priorities once we have sufficient resources to devote.
We cannot provide any assurance that neither we nor our independent auditors will in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not discovered to date.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. 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. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or 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. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions of deterioration in the degree of compliance with policies or procedures.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in internal control over financial reporting.
During the last fiscal quarter, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
On May 6, 2011, the Board of Directors authorized that the Company issue 33,750 shares of the Company's common stock to a vendor, Anshul Mohaan who is willing to convert $6,750 of accounts payable owed to him. The stock was authorized but not issued by December 31, 2011; and subsequently has been issued.
On February 13, 2012, the Company entered into a “Sales Outsourcing Agreement” with Stanley Altschuler to provide direct sales support and closure to pre-determined list of clients. Pursuant to the agreement, Stanley Altschuler, would receive compensation that includes a Common Stock Purchase Warrant to purchase 500,000 shares of Common Stock exercisable for five years at $0.45 per share and vest immediately. Additionally, the Agreement provides for “Success Fee” paid to Agent calculated as 10% of gross license revenue and 3.5% of gross services / professional services revenue on sales contracts resulting directly from actions of the Agent. Stanley Altschuler is also a member of Strategic Universal Advisors, LLC, a firm which has a contract with the company to provide investment and public relations consulting services to the Company. The term of the Sales Outsourcing Agreement is one-year.
In November 2008, the Company entered into a convertible note with Mr. Prem Dadlani, in the amount of $15,000, with a term of six months. The Company was unable to repay the note due to cash flow and liquidity issues. Efforts to obtain a forbearance agreement have not been successful. In November 2011, Mr. Dadlani through legal counsel has sought resolution and payment. In an effort of good faith negotiations with Mr. Dadlani, The Board of Directors authorized, on February 24, 2012, that the Company issue 100,000 shares of the Company's common stock in exchange for a forbearance agreement in which the unpaid principal and accrued interest be extended until June 30, 2012. Subsequently, since the shares authorized on February 24, 2012 were not issued, the Board of Directors authorized, on October 10, 2012, that the Company issue 400,000 shares of the Company’s common stock as consideration for a forbearance agreement and to extend the maturity date of his note to April 30, 2013.
On February 24, 2012, the Company entered into a consulting agreement with Manish Nandy, to provide marketing and proposal development services to support several Company customer initiatives. The term of the agreement is for three months, and the consultant will receive a payment of $6,500. At the discretion of the Company the Consultant can be paid up to $5,000 of the payment in shares of common stock @ $0.40 per share.
On February 24, 2012, the Board of Directors approved the loan of a related party, Vijay Suri, President & CEO, in the amount of $8,750 for the specific purposes of financing critical payroll and other payment obligations. The Board authorized the Company to issue a third Promissory note with a principal amount of $8,750 with interest to accrue at 5% per annum; and payable in six months. Further, since the Company has been unable to repay any amounts toward principal related to Mr. Suri’s promissory notes, The Company was forced to reset the interest rate to the penalty rate of 5%. Total principal owed to Vijay Suri from three promissory notes issued by the Company is $59,350, not including accrued and unpaid interest.
On February 24, 2012, the Board of Directors approved the payment $7,500 per month, in the form of a warrant to purchase 112,500 shares of common stock @ $0.40 per share; for unpaid legal services performed from July 1, 2011 until December 31, 2011, and approved the continuation of legal services provided by current corporate legal counsel.
Due to the Company’s need for additional financing, the Board of Directors on February 24, 2012, approved the receipt of investment funds from two new investors in the amount of $20,000 each. The investments are in the form of an 8% promissory note due in six months, on June 22 and July 22 2012, respectfully. Additionally, the note holders received upon issuance of the Note, 20,000 shares of the Company’s common stock, par value $0.0001 per share. The Company also agreed that should the Company fail to pay interest and principal due at the maturity date, the Note Holder shall receive an additional 40,000 shares of Common Stock. The Company received on December 22, 2011, $20,000 under a promissory note from an individual; then the Company received another $20,000 on January 22, 2012, under a promissory note similar to the one received on Dec 22, 2011..
In an effort to obtain required equity or debt financing for technology development, market penetration and revenue growth, the Board of Directors have sought additional financing, therefore on February 24, 2012, the Board of Directors approved entering into discussions with three different investment groups for the purposes of obtaining additional financing. The Board of Directors approved the Company entering into a term sheet with Joseph Capital LLC. dated December 27, 2011; further the Board approved the Company entering into an engagement agreement dated January 23, 2012 with Strategic Research Associates, Inc.; and the Board also approved the Company entering into a term sheet with Anomaly Analytics, LLC. dated February 14, 2012. To date no final term sheet has been accepted, nor any final agreement for financing has been reached with any of these firms, the Company has terminated discussions with these firms.
On March 6, 2012, the Company received an investment of $100,000, and issued an additional 250,000 units of the Company’s Series B offering consisting of (i) 10% convertible redeemable preferred stock (“Series B Preferred Stock”) of InferX Corporation with a purchase price of $0.40 that are convertible into shares of the Company’s common stock, at $0.40 per share, and (ii) a warrant exercisable for two years for that number of shares into which each warrant converts equal to the number of Series B Preferred Stock purchased, and having an exercise price of $0.75 per warrant share. As of April 19, 2012, the Company has issued a total of 1,156,250 Series B shares at $0.40 per share to accredited investors in private placement for a total of $462,500. To date none of the Series B Preferred Stock has been converted to shares of common stock, nor any warrants exercised.
The Company was notified on March 9, 2012, by Citibank, N.A. that their Line-of-Credit loan to the Company was sold on February 29, 2012, to Entrepreneur Growth Capital, LLC, 505 Park Avenue, New York, NY 10022. Through this action the line of credit is terminated and is now a term loan secured by the Company’s assets, accounts receivables, and the personal guarantee by the Company’s President & CEO, per the terms of the original agreement and stipulated by Entrepreneur Growth Capital, LLC through the acquisition of the note from Citibank. The Company is in discussions with Entrepreneur Growth Capital, LLC to determine the new payment and interest schedule for this loan.
The Board of Directors, on March 13, 2012 authorized the Company grant to Dr. Jerzy Bala, the Chief Technology Officer, a Common Stock Purchase Warrant to purchase 1,000,000 shares of the Company's common stock, such shares of the warrant to vest immediately upon grant at an exercise price of $.30 per share that are exercisable for a period of five years from the date of grant. The Board of Directors also authorized that the Company grant a Common Stock Purchase Warrant to purchase 150,000 shares of its common stock to another Company employee in recognition of his contributions to the Company. Such shares of the warrant are to vest 50,000 shares on March 13, 2012, and 50,000 shares on the first and second anniversary dates of issue, at an exercise price of $.30 per share that are exercisable for a period of five years from the date of grant.
On March 18, 2012, the Company entered into a consulting agreement with Amrit Chase, to provide financial services to support the document and financial preparation for the Company’s 2011 10K filing. The term of the agreement is for three months, and the consultant will receive two monthly payments of $5,000 as well as be issued 150,000 shares of common stock.
On April 3, 2012, the company was notified of a Warrant In Debt had been filed in the General District Court of Fairfax County, Virginia, by PCT Law Group, PLLC, to appear in General District Court of Fairfax County, Virginia on April 30, 2012 in the matter to resolve unpaid debt in the amount of $12,156 plus attorney’s fees and court costs. The Company received a Garnishment Summons dated November 14, 2012 from the Court of Fairfax County, Virginia for the unpaid amount plus interest, judgment costs, and attorney fees for a total of $16,883.69. Although the Company disputes the amount outstanding, the Company is in negotiations with PCT Law Group, PLLC for settlement.
On April 13, 2012 the Company filed a Form 8-K with the Securities and Exchange Commission notifying shareholders that on April 6, 2012, as a result of a deadlocked Board of Directors the following employees submitted their letter of resignation as employees of the Company: B.K. Gogia, President, Technology Solutions Group, Raimondo Piluso, COO and Vice President of Business Development, Jerzy Bala, CTO, and Rahul Argade, Senior Director. B.K. Gogia maintained his position as Chairman of the Board of Directors. Subsequently, Jerzy Bala, CTO and Rahul Argade, Senior Director rescinded their resignations based on the strategy and direction presented by the former CEO, Vijay Suri.
Additionally, in the April 13, 2012 Form 8-K filing the Company informed shareholders that on April 12, 2012 Rahul Argade, the holder of an 8% secured convertible debenture, issued pursuant to a Debenture and Warrant Purchase Agreement dated December 23, 2009, notified the Company that it was in default under the terms of the Debenture for failure to repay the principal amount of $100,000 plus interest due, and that he would be exercising his default remedies under the Debenture, including the default interest rate of 22% on the unpaid principal balance effective as of April 7, 2012. The Debenture is secured by all assets of the Company, including its intellectual property.
On July 23, 2012, the Company filed a Form 8-K with the Securities and Exchange Commission notifying shareholders that Mr. Vijay Suri, President and CEO of InferX and a member of its Board of Directors, resigned as President and CEO and from the Board of the Company. Mr. B.K. Gogia, the founder of InferX, remained as Chairman of the Board and has assumed the positions of Acting President and CEO of InferX. Mr. Gogia intends to form a new management team for the Company. Further, Jerzy Bala, CTO tendered his resignation on June 15, 2012, and Rahul Argade, Senior Director also tendered his resignation.
As part of the July 23, 2012 filing of Form 8-K with the Securities and Exchange Commission, the Company notified shareholders that as a result of a dilutive issuance of shares on December 1, 2010 that was not disclosed to the two holders of debentures issued by the Company that it had sold 1,000,000 shares of common stock in December 2010 to an investor for $0.002 per share. This sale triggered rights under the debentures to convert debt into common stock at the same price. The Debentures were convertible into shares of common stock at a conversion price equal to $0.20 per share (the "Initial Conversion Price"). The Debentures also provided that, in the event InferX sold any common stock or other equity securities at an effective price per share that was lower than the Initial Conversion Price (a "Dilutive Issuance"), the Initial Conversion Price for the Debenture holders would be reduced to the lower price per share charged in connection with the Dilutive Issuance.
Without knowledge of the Dilutive Issuance, one of the debenture holders sent notices of conversion on January 19, 2011, May 19, 2011 and December 5, 2011. On each occasion, InferX honored the holder’s conversion request but utilized the Initial Conversion Price of $0.20 instead of the Base Conversion price of $0.002 per share. As a result of InferX's failure to apply the Base Conversion Price listed in the debenture, conversions on January 19, 2011, May 19, 2011 and December 5, 2011, InferX failed to issue 57,737,870 shares of common stock due to the debenture holder. On June 17, 2012, the other debenture holder notified InferX and Vijay Suri that he was converting $20,000 of principal and $21,397 in interest due into InferX common stock. Applying the Base Conversion Price that resulted from the Dilutive Issuance, the Company should have issued the second debenture holder 20,698,615 shares.
As a result of the Dilutive Issuance, the debenture holders were eligible to be issued 78,436,485 shares of common stock. Instead, the debenture holders elected to receive only 23,698,615 of the shares due the debenture holders and to release the Company from any financial damages incurred. The debenture holders have offered to place 57.48% or 44,737,870 of the shares due the debenture holders into escrow for the Company to use to secure the necessary financing, incentivize additional management talent and make acquisitions and forego being issued 10,000,000 shares. A percentage of the escrowed shares, to be mutually agreed to, will be cancelled upon the settlement of outstanding debt and past due salaries, certain intellectual property and patent enhancement of its current software products, and future financings.
Immediately prior to the issuance of the shares of InferX common stock under the Debentures, there are 20,669,453 shares issued and outstanding of which Vijay Suri owned 9,779,768 shares or 48.9% of the issued and outstanding shares of InferX. Following the conversion of the Debentures there will be 44,368,068 shares of InferX common stock issued and outstanding. The debenture holders will own 23,698,615 shares directly, excluding the 44,737,870 escrowed shares discussed above.
As a result of the resignation of Mr. Vijay Suri, President and CEO of InferX and a member of its Board of Directors; Mr. B.K. Gogia, by default became the sole member of the Board of Directors of InferX Corporation. The Board has taken the following actions.
The Board of Directors, on October 10, 2012 resolved to issue a warrant to a consultant to purchase up to 2,000,000 shares of the Company’s common stock at an exercise price of $0.04 per share for five years; all such shall vest immediately. In light of dilutive issue and to avoid any legal issue since the Certificate was not filed in June 2011 at the time of first investment received under the Series B Preferred Shares term sheet, the Board also resolved to reduce the conversion price to common shares from $0.40 to $0.07 per share and reprice the warrants from $0.75 to $0.20 to the eight purchasers of the 1,156,250 Series B Preferred Shares units.
The Board of Directors also resolved on October 10, 2012 to authorize the voluntary release and conversion of past due salary of four employees in the amount of $1,240,303 into 20,730,390 shares of the Company’s common stock at a conversion price of $0.10. Further the Board of Directors issued to a consultant 1,000,000 shares of common stock at a conversion price of $0.04, for advice and counsel with two separate complex investment financing initiatives the Company was undertaking.
On October 15, 2012, the Company was notified of a Summons to appear in the Superior Court of Washington, DC, on October 13, 2012, in a matter which Fairchild Consultants, LLC, d/b/a Global Services a marketing support consulting services firm is seeking unpaid general consulting services fees in the amount of $9,900. Although the Company disputes the amount outstanding, the Company is in negotiations with Fairchild Consultants, LLC for resolution and settlement.
On October 25, 2012, the Board of Directors, recognizing that an error had been made concerning the filing of the Company’s application for Certificate of Designation pursuant to Section 151 of the General Corporation Law of the State of Delaware, made immediate notification and filing of appropriate documents with Secretary of State, State of Delaware for the designation of the series of Preferred Stock: “Series B Redeemable Convertible Preferred Stock”. The number of authorized shares of Series B Convertible Preferred Stock shall be 1,500,000. Interest at the rate of 10% per annum shall be payable annually in cash or in kind based upon the 30 day bid price moving average, at the Company’s discretion.
The Board of Directors, on November 13, 2012, resolved to reach an agreement with Fourth Street Fund forbear from sending a default notice to the Company and extending the maturity date of the Debenture to July 24, 2013. Further it was agree to correct the amount due under the Debenture, conversion of certain interest due under the Debenture, to issue additional shares of the Company’s common stock under the Class A, B, and C warrant conversions as a result of a dilutive issuance by the Company in December 2009 that reduced the share price to $0.002 per share. Additionally, The Company agreed to allow Fourth Street Capital to gift certain principal amounts of the debenture to a number of persons, and to limit the amount of further reductions for $50,000 of unpaid principal under the Debenture to $0.20 per share in the event that the Company meets a new investment financing deadline of December 31, 2012.
In an effort to obtain required equity or debt financing for technology development, market penetration and revenue growth, the Board of Directors have sought additional financing, therefore on October 2, 2012, the Board of Directors approved Stock Purchase Agreement, in which the Company has authorized the sale of an aggregate 16,666,667 shares of the Company’s common stock for an aggregate maximum purchase price of $500,000, based upon a per share price of $0.03, or a pre-money valuation of approximately $3,000,000. Further, the Company established an aggregate minimum purchase of $200,000, representing 6,666,666 shares of the Company’s common stock. The shares sold would be issued to the Investor as a unit of Common Stock and a warrant exercisable for five years to purchase 50% of the number of shares of common stock purchased by each investor, at an exercise price of $0.05 per share.
Within the framework of the Stock Purchase Agreement the Company received on December 4, 2012 from one investor $6,000, representing the sale of 200,000 shares of the Company’s common stock and issued a warrant exercisable for five years to purchase 100,000 shares of common stock at an exercise price of $0.05 per share.
To meet critical short-term financial requirements the Company entered into a 5% Convertible Promissory Note, with an investor in the amount of $6,500. Under the terms of the Note, the entire principal amount, together with all accrued interest is due on January 2, 2013.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the name, age, position and term of directorship, as applicable, of each of our directors and executive officers. Directors are elected annually. Officers are selected by the Board of Directors and serve at the pleasure of the Board.
Name and Position
Age
Since
B.K. Gogia
Chairman of the Board of Directors and Managing Director, Technology Solutions Group
Vijay Suri
President and Chief Executive Officer and a Director
Dr. Jerzy W. Bala
Chief Technical Officer and a Director
Raimondo Piluso
Chief Operating Officer and VP of Business Development
Management Biographies
Vijay Suri - Mr. Suri, became President and CEO of InferX upon completion of the merger with between the Irus Group and InferX in November 2009. As founder and President of The Irus Group, Mr. Suri brings over 20 years of experience designing and implementing large and complex predictive analytics, business intelligence and corporate performance management solutions. In addition to his role as CEO, Mr. Suri leads sales efforts in the targeted financial services vertical. Prior to starting The Irus Group, Inc., he served in various management positions at Fannie Mae, Information Resources Incorporated (IRI Software) and Oracle Corporation. Mr. Suri developed the "Iterative Prototyping Development Approach" (IPDA) Methodology for implementing OLAP and Data Warehousing Projects. Under his guidance, The Irus Group has emerged as a market leader in the Business Intelligence and Analytics community, as well as a global firm offering large-scale, turn-key solutions. Mr. Suri holds an MBA from Alabama A&M University, Huntsville, AL, a graduate of the Leadership Development Program from the University of Maryland, College Park, MD, and a graduate from the Harvard Business School Owner/President Management Program (HBS-OPM 37), a comprehensive multi-year program helping global business leaders understand the strategic and tactical challenges and opportunities associated with owning, running, and sustaining a profitable enterprise.
Key Director Qualifications: Mr. Suri has had years of experience providing consulting services in the business intelligence and analytics field which constitutes an important component of the Company's revenues now and for the immediate future. Mr. Suri also has the background with software products to help launch the sale of the Company's predictive analytics software that is expected to become the principal focus of the Company's future revenues, as well as having had the management experience to lead an emerging growth company.
B.K. Gogia - Mr. Gogia was the Chief Executive Officer of InferX until its merger with The Irus Group in November 2009. He now serves as Managing Director of Technology Solutions Group developing the long term strategy for Company’s product roadmap while serving as Executive Chairman. An accomplished business leader and entrepreneur with recognized expertise and notable credentials in the technology industry, Mr. Gogia brings InferX proven skill in developing and executing strategic plans for advanced analytical solutions for healthcare in emerging markets. In this role, Mr. Gogia leads the marketing of product development into solutions offering in targeted sectors, with particular emphasis on the healthcare vertical. He works closely with the CEO in new business development activities to identify and develop new business direction for the Company. Prior to the formation of InferX, Mr. Gogia was Technical Director/Software Manager with Science Applications International Corporation (SAIC), and held senior technical positions with a firm now absorbed in L3 Corporation through acquisition and Lockheed Martin Corporation. Mr. Gogia began his career as software developer with Data General Corporation in the field of compilers and operating systems. Mr. Gogia holds a Bachelor’s degree from the University of Delhi, India; a Master’s degree with a major in Computer Science from New York Institute of Technology; and a postgraduate management degree with a major in Marketing from the Institute of Marketing & Management. In 2004, Mr. Gogia was selected to participate in a Mindshare program for CEOs of the most promising technology companies in the Greater Washington area.
Key Director Qualifications: Mr. Gogia has many years of experience in developing the Company's predictive analytics software and in developing strategic plans to commercialize software offering advanced analytical solutions.
Jerzy W. Bala, Ph.D. - Dr. Bala is the co-founder of InferX and was appointed Chief Technical Officer of InferX in May 2006 and a director in September 2006. Dr. Bala defines short and long term technology directions for the Company’s products, business cases for new target markets, oversees research and development of future products and existing products, and manages intellectual property for InferX. Dr. Bala has also consulted with Mitre Corporation, a federally funded research and development corporation (FFRDC) in its Data Exploitation and Information Management Group in development of data mining techniques for network intrusion detection sponsored by the National Security Agency; and subsequent development of data exploitation techniques for command and control in simulations in operations other than war for the U.S. Marine Corps. Dr. Bala has also served as Visiting Research Professor with the School of Information Technology, George Mason University, and was the recipient of a Fellowship in Computational Science and Engineering - National Science Foundation New Technologies Program in the Division of Advanced Scientific Computing. Dr. Bala holds a Ph.D. in Computer Science from George Mason University, an MSc in Computer Engineering and a BSc in Electrical Engineering from AGH University of Science and Technology in Poland. Dr. Bala’s Doctoral Dissertation Thesis was in “Learning to Recognize Visual Concepts,” with his Advisor, Professor Ryszard Michalski, a cofounder of Machine Learning as a discipline. Dr. Bala has over 80 peer reviewed publications in conference proceedings and journals and other numerous technical papers to his credit.
Raimondo Piluso - Mr. Piluso is our Chief Operating Officer and Senior Vice President of Business Development. Mr. Piluso is a senior operations and sales executive with more than 19 years of information technology solutions experience that span from small to large enterprise environments. In his role as COO and Senior Vice President Business Development, Mr. Piluso serves as the Company’s lead operations executive leading and implementing growth initiatives, delivery operations plans, business development, sales and marketing strategies. Mr. Piluso leads and executes business growth through organic business capture and supports strategic teaming initiatives. He began his career in the U.S. Army and transferred to private industry to lead technology implementation for a large-scale DoD program. Holding various leadership positions, Mr. Piluso has a proven record of building teams that have earned reputations for quality excellence, solution delivery and customer satisfaction. Companies he has worked at, before joining the firm, include Advanced Technology, Inc., PRC, Inc., Cameron Run Group, Inc., Compaq Computer, and Hewlett-Packard, Inc. In addition to 24 years’ experience in the private sector, Mr. Piluso currently serves in the U.S. Army Reserve. With over 29 years of total military service, Mr. Piluso brings operational, managerial, and technical experience, including assignments around the globe. Mr. Piluso holds a B.S. degree from University of Southern Colorado, along with multiple certifications from various technology companies.
There are no family relationships among the officers and directors.
Board of Advisors
Dr. Farzad Najam, M.D., FACS, - Dr. Najam is employed by Healthcare Predictive Analytics Solutions. Dr. Najam is a renowned surgeon. Dr. Najam is currently the Associate Director of Cardiac Surgery at the George Washington University (GWU) Hospital in Washington, DC, USA. Dr. Najam also holds an appointment as the Associate Clinical Professor of Surgery at the GWU Medical Center, Washington, DC. Dr. Najam is a fellow of the American College of Surgeons. He is an active member of the Society of Thoracic Surgeons (STS) and International Society of Minimally Invasive Cardiothoracic Surgery (ISMICS). He received the GWU Hospital Baldridge Physician of the month award in 2008 and has published numerous articles in peer reviewed medical journals. He is also the co-editor of Robotic Surgery: Theory and Operative Technique, a ground-breaking textbook on robotic surgery, published by McGraw Hill Inc, New York, NY. The book won the first prize at the 2009 British Medical Association Medical Books Awards.
Mark Lowers is employed by Enterprise Risk Management Solutions. Mr. Lowers is a founder and principal in Lowers & Associates, an international firm specializing in risk management and mitigation. In this capacity, he provides senior leadership and direction for the rapidly-growing organization, based in Virginia, with offices in London & Miami. As an internationally-recognized authority on risk management, Mr. Lowers has more than 25 years of experience in the field. He is regularly cited as a source by journalists, and has also written on the subject of risk management in trade publications. Prior to launching L&A, Mr. Lowers served as president and CEO of AMSEC International, a global security organization based in Winchester, Virginia. In his more than two decades as leader of the organization, he oversaw its expansion from a physical security systems installer to a multinational player in risk management. During his tenure, Mr. Lowers directed the development of internal processes for client service and quality control. He also oversaw the creation of sophisticated loss control programs and industry standards for the exclusive use of a major international insurer serving a variety of industries, including warehousing, retail, law firms, leasing companies and others. Mr. Lowers has an extensive educational background focused on criminal justice; he is a Certified Fraud Examiner, a member of the National Armored Car Association, (NACA) and an appointee on NACA's Security Steering Committee. He is also a member of the Independent Armored Car Operators Association, the American Society for Industrial Security, and the Risk & Insurance Management Society. In addition, Mr. Lowers has served as Chairman of the Board of Directors for Inova Loudoun Hospital since 1998 and is a current board member of Inova Health System.
Compliance with Section 16(a) of the Securities Exchange Act
Based solely upon a review of Forms 3 and 4 furnished under Rule 16a-3(e) of the Securities Exchange Act during its most recent fiscal year, Forms 5 furnished with respect to our most recent fiscal year and any written representations received from persons required to file such forms, the following persons - either officers, directors or beneficial owners of more than ten percent of any class of equity we have registered pursuant to Section 12 of the Securities Exchange Act - failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act during the most recent fiscal year or prior fiscal years: Scott Parliament failed to file one Form 4 with respect to one transaction.
Code of Ethics
InferX Corporation has adopted a Code of Ethics that is applicable to its chief executive officer, chief financial officer, chief accounting officer and controller, which Code of Ethics is incorporated by reference in Exhibit __ to this Annual Report on Form 10-K. InferX Corporation also has a general code of ethics applicable to all employees, which is referred to as its Statement of Business Principles and Code of Ethics. That document is available on our website at http://www.inferx.com or upon written request made to InferX Corporation, 46950 Jennings Farm Drive, Suite 290, Sterling, Virginia 20164-8679, Attention: Corporate Secretary.
Audit, Nominating and Compensation Committees
Our Board of Directors does not have standing Audit, Nominating or Compensation committees, therefore our Board of Directors performs those functions that would otherwise be delegated to such committees. We have not obtained directors and officers insurance required by the quality of independent directors who we seek to have join our Board of Directors. We are in the process of pricing directors and officers insurance. Accordingly, we anticipate that our Board of Directors will be able to attract qualified independent directors to serve on the Board and ultimately form standing Audit, Nominating and Compensation committees.
Item 11.
Item 11. Executive Compensation
Compensation paid to Vijay Suri, as President and Chief Executive Officer, during the fiscal year ended December 31, 2011, and each other executive officer whose compensation exceeded $100,000 in the fiscal year ended December 31, 2011 are set forth in the Summary Compensation Table below.
SUMMARY COMPENSATION TABLE
(1)Consists of an automobile allowance in the amounts of $850(a), $600(b), $350(c), and $500(d) respectively.
(2)Commissions earned
(3)Actual total compensation paid for 2011 was $71,571, balance has been accrued and reflected in the financial statements.
(4)Actual total compensation paid for 2011 was $62,453, balance has been accrued and reflected in the financial statements.
(5)Actual total compensation paid for 2011 was $90,581, balance has been accrued and reflected in the financial statements.
(6)Actual total compensation paid for 2011 was $72,691, balance has been accrued and reflected in the financial statements.
(7)Effective October 10, 2012, four employees released their claim of accrued salary in the amount of $1,240,303 and accepted 20,730,390 shares of the Company’s common stock in exchange.
Mr. Vijay Suri executed an employment agreement dated October 27, 2009 with InferX. Under the terms of his employment agreement, Mr. Suri is employed for a five year term as President and CEO of InferX. Mr. Suri will receive an annual base salary of $230,000, the right to receive additional compensation in the form of a bonus that can be paid in cash or stock, such bonus to be at the discretion of the Board and subject to such conditions as the Board and Mr. Suri mutually agree and customary benefits for senior executives of InferX. The employment agreement is terminable by Mr. Suri for “good reason”, including a material breach of the employment agreement not cured within 15 days. Upon termination for “good reason” by Mr. Suri or by the Company without cause, Mr. Suri will receive a severance payment equal to the greater of two years or the remaining term of his employment agreement.
Mr. B.K. Gogia executed an employment agreement dated October 27, 2009 with InferX. Under the terms of his executive employment agreement, Mr. Gogia is employed for a term of five years. Mr. Gogia will receive a base salary of $200,000 per annum, payable semi-monthly, which base salary shall increase to $230,000 per annum when the Company first achieves EBITDA equal to at least $1,000,000 as reported in the Company’s quarterly reports or in the annual report filed with the SEC or, if not a reporting company under the Securities Exchange Act of 1934, as amended, the financial statements reviewed by the Company’s independent accounting firm. Mr. Gogia is eligible for a bonus to be paid in cash, stock or both on terms that shall be mutually acceptable to the Board and Mr. Gogia. In the event that InferX sells or licenses its software product for at least $1,000,000 or generates EBITDA of $1,000,000 it shall pay Mr. Gogia $122,000 which is equal to his unpaid salary for 2009 under his May 1, 2006 Executive Employment Agreement. Mr. Gogia also received a grant for an option under the Company’s 2006 Stock Incentive Plan to acquire 1,750,000 shares of the Company’s common stock at the market price on the date of grant on the effective date of the merger between InferX and The Irus Group, Inc. under Delaware law; with 1,750,000 options that vested on December 31, 2009. The Company also will issue Mr. Gogia 300,000 restricted shares of the Company’s common stock. Mr. Gogia’s employment agreement is terminable by the Company during the term with or without cause. The employment agreement is terminable by Mr. Gogia for “good reason”, including a material breach of the employment agreement not cured within 15 days. Upon termination for “good reason” by Mr. Gogia or by the Company without cause, Mr. Gogia will receive over a six month period a severance payment equal to the greater of greater of (i) 24 months of his then-current base salary or (ii) the remainder of the term of this Agreement. All options will be subject to accelerated vesting if Mr. Gogia’s employment is terminated by him for Good Reason, as that term is defined in his employment agreement.
Dr. Jerzy Bala executed an employment agreement dated October 17, 2009 with InferX. Under his employment agreement Dr. Bala will receive an annual salary of $156,000 per annum, payable semi-monthly and a one-time bonus upon the closing of the merger between InferX and The Irus Group of $85,619 which is equal to 50% of his unpaid salary for 2009 under his prior May 1, 2006 employment agreement. Dr. Bala also received a grant for an option under the Company’s 2006 Stock Incentive Plan to acquire 1,000,000 shares of the Company’s common stock at the market price on the date of grant on the effective date of the merger between InferX and The Irus Group, Inc. under Delaware law; with 1,000,000 options that vested on October 17, 2009. Dr. Bala also is eligible for a bonus upon achieving objectives determined by management for him for achieving certain performance targets. Dr. Bala’s employment agreement has a term of three years and is terminable by the Company during the term with or without cause. The employment agreement is terminable by Dr. Bala for “good reason”, including a material breach of the employment agreement not cured within 15 days. Upon termination for “good reason” by Dr. Bala or by the Company without cause, Dr. Bala will receive over a six month period a severance equal to the greater of 12 months or the remaining term of his employment agreement.
Mr. Raimondo Piluso executed an employment agreement dated December 15, 2009 with InferX. Under his employment agreement Mr. Piluso will receive an annual salary of $175,000 per annum, payable semi-monthly. Mr. Piluso will be eligible for a bonus to be paid in cash, stock or both on terms that shall be mutually acceptable to the Board and Mr. Piluso. Upon execution of Mr. Piluso’s Executive Agreement he received an option to acquire 500,000 shares of the Company’s common stock under the Company’s 2006 Stock Incentive Plan, of which 200,000 shares shall vest upon execution of this Agreement and 150,000 shares shall vest upon the first and second anniversaries of the date of his Employment Agreement; as of December 31, 2011, 500,000 options have vested. Mr. Piluso’s employment agreement has a term of three years and is terminable by the Company during the term with or without cause. The employment agreement is terminable by Mr. Piluso for “good reason”, including a material breach of the employment agreement not cured within 15 days. Upon termination for “good reason” by Mr. Piluso or by the Company without cause, Mr. Piluso will receive over a six month period a severance equal to the greater of 12 months or the remaining term of his employment agreement.
We have a 401(k) plan for which we provide matching funds. In October 2007, we adopted a qualified stock option plan that will include up to 5,000,000 shares of our common stock. No other retirement, pension, or profit sharing plans exist.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The table entitled “DIRECTOR COMPENSATION” and the discussion related to that table has been omitted because no compensation required to be reported in that table was awarded to, earned by or paid to any of the directors in any of the covered fiscal years.
Item 12.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of December 14, 2012, certain information concerning the beneficial ownership of common stock by (i) each person known by the company to be the owner of more than 5% of the outstanding common stock, (ii) each director, (iii) each Named Executive Officer, and (iv) all directors and executive officers as a group. In general, “beneficial ownership” includes those shares a director or executive officer has the power to vote or the power to transfer, and stock options and other rights to acquire common stock that are exercisable currently or become exercisable within 60 days. Except as indicated otherwise, the persons named in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them. The calculation of the percentage owned is based on 65,793,713 common shares outstanding (plus, with respect only to each holder of securities that are exercisable for or convertible into common stock within 60 days, shares underlying such securities). The address of each of the directors and executive officers listed below is c/o InferX Corporation, 46950 Jennings Farm Drive, Suite 290, Sterling, Virginia 20164-8679 unless otherwise indicated.
(1) Includes 17,734 shares controlled directly by Mr. Gogia as custodian for minors.
(2) Includes 50,000 shares owned directly by Mr. Suri’s spouse.
(3) Cede & Company operates as a depository company and holds the shares as nominee on behalf of brokerage firms, mutual funds, and other active traders. Cede & Co. may beneficially have client holdings that represent 5% or greater of outstanding shares or significant holdings which would have a direct impact on any shareholder involvement in the Company. Cede & Co. is based in New York, New York.
(4) Includes 3,653 shares owned jointly by Dr. Bala and his wife.
Item 13.
Item 13.Certain Relationships and Related Transactions, and Director Independence.
Director Independence
The Board of Directors has determined that none of its directors is an “independent director.”
Item 14.
Item 14.Principal Accounting Fees and Services.
Audit Fees
We first engaged KBL, LLP to be our independent registered public accounting firm in May 2006. The aggregate fees billed to us for each of the years ended December 31, 2011 and 2010, for professional accounting services, including KBL’s audit of our annual consolidated financial statements, are set forth in the table below.
For purposes of the preceding table, the professional fees are classified as follows:
Audit fees - These are fees billed for the year shown for professional services performed for the audit of the consolidated financial statements included in our Form 10-K filing for that year, the review of condensed consolidated financial statements included in our Form 10-Q filings made during that year, comfort letters, consents and assistance with and review of documents filed with the SEC. Audit fees for each year shown include amounts that have been billed to us through the date of this filing and any additional amounts that are expected to be billed to us thereafter.
Audit-related fees - These are fees billed for assurance and related services that were performed in the year shown and that are traditionally performed by our independent registered public accounting firm. More specifically, these services include: regulatory filings; due diligence services related to mergers, acquisitions and dispositions; internal control reviews; and attestation services that are not required by statute or regulation (including attestation services relating to employee benefit trust funds where the fees are paid by the trust instead of by us. Audit-related fees for each year shown include amounts that have been billed to us through the date of this filing.
The Board of Directors approved in advance all of the services performed by KBL, LLP described above.
Tax Fees
We first engaged Chawla & Chawla P.C. to be our independent registered public accounting firm in May 2009. The aggregate fees billed to us for each of the years ended December 31, 2011 and 2010, for professional accounting and tax services, are set forth in the table below.
Tax fees-These are fees billed for all professional services performed in the year shown by professional staff of our independent registered public accounting firm’s tax division except those services related to the audit of our financial statements. These include fees for tax compliance, tax planning and tax advice. Tax compliance involves preparation of original and amended tax returns, refund claims and tax payment services. Tax planning and tax advice encompass a diverse range of subjects, including assistance with tax audits and appeals, tax advice related to mergers, acquisitions and dispositions, and requests for rulings or technical advice from taxing authorities. Tax fees for each year shown include amounts that have been billed to us through the date of this filing.
The Board of Directors approved in advance all of the services performed by Chawla & Chawla P.C. described above.
All Other Fees
None.
PART IV
Item 15.
Item 15.Exhibits and Financial Statement Schedules
Our consolidated financial statements for the fiscal years ended December 31, 2011 and 2010 are filed with this report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
InferX Corporation
Sterling, VA
We have audited the accompanying consolidated balance sheets of InferX Corporation (the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years ended December 31, 2011 and 2010. 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 audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InferX Corporation as of December 31, 2011 and 2010, and the results of its consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years ended December 31, 2011 and 2010 in conformity with 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 1 to the consolidated financial statements, the Company has sustained significant operating losses and is currently in default of its debt instrument and needs to obtain additional financing or restructure its current obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KBL, LLP
New York, NY
December 18, 2012
INFERX CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
The accompanying notes are an integral part of these consolidated financial statements.
INFERX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
The accompanying notes are an integral part of these consolidated financial statements.
INFERX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
The accompanying notes are an integral part of these consolidated financial statements.
INFERX CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
The accompanying notes are an integral part of these consolidated financial statements.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
Black Nickel Acquisition Corporation I was incorporated in Delaware on May 26, 2005, and was formed as a vehicle to pursue a business combination. From inception through October 24, 2006, Black Nickel Acquisition Corporation I, was engaged in organizational efforts and obtaining initial financing.
On May 17, 2006, Black Nickel Acquisition Corporation I entered into a letter of intent with InferX Corporation, a privately-held Virginia corporation (“InferX Virginia”), with respect to entering into a merger transaction relating to bridge financing for InferX Virginia and the acquisition of and merger with InferX Virginia. The transaction closed on October 24, 2006. Following the merger, Black Nickel Acquisition Corporation I effected a short-form merger of InferX Virginia with and into Black Nickel Acquisition Corporation I, pursuant to which the separate existence of InferX Virginia terminated and Black Nickel Acquisition Corporation I changed its name to InferX Corporation (“InferX” or the “Company”).
The transaction was recorded as a recapitalization under the purchase method of accounting, as InferX became the accounting acquirer. The reported amounts and disclosures contained in the consolidated financial statements are those of InferX Corporation, the operating company.
InferX was incorporated under the laws of Delaware in 1999. On December 31, 2005, InferX and Datamat Systems Research, Inc. (“Datamat”), a company incorporated in 1992 under the corporate laws of the Commonwealth of Virginia executed an Agreement and Plan of Merger (the “Merger”). InferX and Datamat had common majority directors. The financial statements herein reflect the combined entity, and all intercompany transactions and accounts have been eliminated. As a result of the Merger, InferX merged with and into Datamat, the surviving entity. Upon completion, Datamat changed its name to InferX Corporation.
InferX was formed to develop and commercially market computer applications software systems that were initially developed by Datamat with grants from the Missile Defense Agency. Datamat was formed as a professional services research and development firm, specializing in services for the Department of Defense. The Company provided services and software to the United States government and to commercial entities as well.
On March 16, 2009, the Company entered into an agreement and plan of reorganization (the “Merger Agreement”) with the Irus Group, Inc. (“Irus”) under which it effected a reverse triangular merger between Irus and the Company’s wholly-owned subsidiary, Irus Acquisition Corporation (formed for the of completing this transaction). The Merger Agreement was then amended on June 15, 2009 (the “First Amended and Restated Agreement”) to reflect the change in the amount of the shares issued to Irus in the transaction.
Under the terms of the First Amended and Restated Agreement, the issued and outstanding shares of Irus common stock were automatically converted into the right to receive 56% of the issued and outstanding shares of the Company’s common stock.
The Merger Agreement also provides that, at the effective time of the Merger, the Company’s Board of Directors agreed to appoint Vijay Suri, President and CEO of the Company and have Vijay Suri fill a vacancy on its Board of Directors. In addition, effectiveness of the Merger Agreement is conditional upon (i) the Company restructuring existing debt by converting the existing debt and warrants to common stock with the intention of having no more than 57-60 million shares of its common stock outstanding prior to a reverse split of not less than 1:10; (ii) the Company using its best efforts to reduce its accounts payable by 70%, (iii) Vijay Suri, President and CEO of The Irus Group executing an employment agreement with the Company, and (iv) additional customary closing conditions relating to delivery of financial statements, closing certificates as to representations and warranties, and the delivery of any required consents or government approvals.
In accordance with the merger, the Company on July 27, 2009 filed a Schedule 14C with the Securities and Exchange Commission. The Schedule 14C, contained 2 proposals; to increase the authorized common shares from 75,000,000 to 400,000,000 and to reverse split the common stock on a 1:20 basis. All share and per share amounts have been presented on a post-split basis.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1-
ORGANIZATION AND BASIS OF PRESENTATION(CONTINUED)
On October 27, 2009, the Company and Irus Group completed the Merger. As consideration for the Merger, the Company issued 9,089,768 shares of common stock and 1,000,000 shares of preferred stock to Vijay Suri, the sole stockholder of Irus Group. As part of their employment agreements signed on 27 October 2009, both Vijay Suri and B.K. Gogia, each were issued 1,000,000 shares of preferred stock. On June 2, 2010, the Board rescinded the 1,000,000 shares of preferred stock and issued Vijay Suri and B.K. Gogia 1,000,000 shares of common stock in recognition of their personal guarantee of certain corporate debt of the Company, which were issued as of September 30, 2010.
Irus Group was a consulting firm advising on the planning, implementation and development of complex business intelligence and corporate performance management systems. Irus Group has successfully implemented projects across a broad cross-section of clients in the government, financial services, retail, manufacturing, and telecommunications markets. Irus Group has provided business solutions for many large clients, including MasterCard, JP Morgan Chase, ConAgra, and the US Navy, and collaborated with a wide range of technology partners including Oracle, IBM/Cognos and Microsoft.
The Merger with Irus Group was accounted for as a recapitalization under the purchase method of accounting, as Irus became the accounting acquirer. The reported amounts and disclosures contained in the consolidated financial statements are those of Irus Group, the operating company. In the transaction, Irus Group did assume the technology of the Company as well as the liabilities.
Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB)”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles - Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Positions or Emerging Issue Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”).
The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.
Going Concern
As shown in the accompanying consolidated financial statements the Company has incurred a loss of $41,505,616 and $1,950,954 for the years ended December 31, 2011 and 2010, and has a working capital deficiency of $(44,149,421) as of December 31, 2011. The principal reasons for the recurring losses and working capital deficiency relates to the Company’s to a loss incurred through the fair value adjustment on derivative liability of $39,628,463, as well as continued focus on improving cost of operations and delivery, and refining its products, while searching for profitable commercial and government contracts; and the continued availability of capital to the firm. The Company expects the negative cash flow from operations to continue its trend through the next twelve months. Cash liquidity and available investment funds have had a direct impact upon the Company’s ability to expand their pipeline of contracts. Burdened with liabilities that exceed $44.5 million, the Company has been restricted in attracting potential new investors which will provide necessary funds for operations. These factors raise significant doubt about the ability of the Company to continue as a going concern.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
Management’s plans to address these conditions include continued efforts to expand the firm’s current business backlog, by taking focused steps towards an aggressive expansion of our customer base, existing client contract pipeline and selective engagement for the obtainment of new government and commercial contracts. The Company’s leadership team plans to fund these sustainment initiatives by raising additional capital through the sale of the Company’s stock. Additionally, the executive management team continues to refine and implement their aggressive cost and expense savings spending plan to identify and eliminate costs which directly impact profitability.
The Company’s long-term success is dependent upon the continued obtainment of sufficient capital to fund its operations; expand development of its products; and the launching of its high margin products into the worldwide market. These factors will contribute to the Company obtaining sufficient sales volume to be profitable. To achieve these objectives, the Company may be required to raise additional capital through public or private financings or other arrangements.
It cannot be assured that such financings will be available on terms attractive to the Company, if at all. Such financings may be dilutive to existing stockholders and may contain restrictive covenants.
The Company is subject to certain risks common to technology-based companies in similar stages of development. Principal risks to the Company include uncertainty of growth in market acceptance for its products; history of losses in recent years; ability to remain competitive in response to new technologies; costs to defend, as well as risks of losing patent and intellectual property rights; reliance on limited number of suppliers; reliance on outsourced manufacture of its products for quality control and product availability; uncertainty of demand for its products in certain markets; ability to manage growth effectively; dependence on key members of its management; and its ability to obtain adequate capital to fund future operations.
The consolidated financial statements do not include any adjustments relating to the carrying amounts of recorded assets or the carrying amounts and classification of recorded liabilities that may be required should the Company be unable to continue as a going concern.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include those of the Company and its subsidiary.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with a maturity of three months or less, when purchased, to be cash equivalents.
The Company maintains cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit Insurance Corporation up to $250,000.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables as well as historical collection information. Credit is granted to substantially all customers on an unsecured basis. In determining the amount of the allowance, management is required to make certain estimates and assumptions. Management has determined that as of December 31, 2011, no allowance for doubtful accounts is required.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets (primarily three to five years). Costs of maintenance and repairs are charged to expense as incurred.
Computer Software Development Costs
During 2011, the Company capitalized certain software development costs. The Company capitalizes the cost of software in accordance with ASC 985-20 once technological feasibility has been demonstrated, as the Company has in the past sold, leased or otherwise marketed their software, and plans on doing so in the future. The Company capitalizes costs incurred to develop and market their privacy preserving software during the development process, including payroll costs for employees who are directly associated with the development process and services performed by consultants. Amortization of such costs is based on the greater of (i) the ratio of current gross revenues to the sum of current and anticipated gross revenues, or (ii) the straight-line method over the remaining economic life of the software, typically five years. It is possible that those anticipated gross revenues, the remaining economic life of the products, or both, may be reduced as a result of future events. The Company has not developed any software for internal use.
During the year ended December 31, 2011 the Company’s CTO completed a major new product release known as D2A version 2.0. This new product significantly changes the core framework of the D2A platform; and includes multiple new functionalities which were not in the previous product. These functionalities include a front end GUI (graphical user interface); a PA based core; and new back end processes; a major architectural change facilitating SOAP; the addition of a set of universal APIs; the addition of UNIX/Linux operating support; new single multi-OS source code base; and a new set of documents and help files. Ease of adapting the front and back end processes in the new release facilitates rapid and cost effective D2A deployments in diverse data and application environments, and as such significantly extends the potential customer base for InferX. At the same time the CTO is also developing industry specific interfaces to make the core product more end user friendly and more marketable for general applications. The new D2A version 2.0 release became available for sale and deployment on January 2, 2012.
For the years ended December 31, 2011 and 2010, the Company recognized $0 and $64,888 of amortization expense on its capitalized software costs, respectively.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recoverability of Long-Lived Assets
The Company reviews the recoverability of our long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on our ability to recover the carrying value of long-lived assets from expected future cash flows from operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale are carried at the lower of the then current carrying value or fair value less estimated costs to sell.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. We enter into certain arrangements where we are obligated to deliver multiple products and / or services (multiple elements). In these transactions, we allocate the total revenue among the elements based on the sales price of each element when sold separately (vendor-specific objective evidence).
The Company generates revenue from application license sales, application maintenance and support, professional services rendered to customers as well as from application management support contracts with commercial and governmental units. The Company’s revenue is generated under time-and-material contracts and fixed-price contracts.
The Company’s business is not seasonal in nature. The timing of contract awards, the availability of funding from the customer, the incurrence of contract costs and unit deliveries are the primary drivers of our revenue recognition. These factors are influenced by the federal government’s October-to-September fiscal year. This process has historically resulted in higher revenues in the latter half of the government fiscal year. Many of our government customers schedule deliveries toward the end of the calendar year, resulting in increasing revenues and earnings over the course of the year.
The Company does not derive revenue from projects involving multiple revenue-generating activities. If a contract would involve the provision of multiple service elements, total estimated contract revenue would be allocated to each element based on the fair value of each element. The amount of revenue allocated to each element would then be limited to the amount that is not contingent upon the delivery of another element in the future. Revenue for each element would then be recognized depending upon whether the contract is a time-and-materials contract or a fixed-price, fixed-time contract.
Stock-Based Compensation
In 2006, the Company adopted the provisions of ASC 718-10 “Share-Based Payments” (ASC 718-10) which requires recognition of stock-based compensation expense for all share-based payments based on fair value. Share-based payment transactions within the scope of ASC 718-10 include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. This adoption had no effect on the Company’s operations. Prior to January 1, 2006, the Company measured compensation expense for all of the share-based compensation using the intrinsic value method.
The Company has elected to use the modified-prospective approach method. Under that transition method, the calculated expense in 2006 is equivalent to compensation expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company measures compensation expense for non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.
Concentrations
For the years ended December 31, 2011 and 2010, the Company has derived 88% and 95% of its revenue from three customers.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. To date, accounts receivable have been derived from contracts with agencies of the federal government. Accounts receivable are generally due within 30 days and no collateral is required.
Segment Reporting
The Company follows the provisions of ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information”. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. The Company only operates in one reporting segment as of December 31, 2011 and for the years ended December 31, 2011 and 2010.
Fair Value of Financial Instruments (other than Derivative Financial Instruments)
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. For the notes payable, the carrying amount reported is based upon the incremental borrowing rates otherwise available to us for similar borrowings. For the warrants that are classified as derivatives, fair values were calculated at net present value using our weighted average borrowing rate for debt instruments without conversion features applied to total future cash flows of the instruments.
Convertible Instruments
The Company reviews the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the embedded conversion feature. Generally, embedded conversion features, where the ability to physical or net-share settle the conversion option is not within the control of the Company, are bifurcated and accounted for as a derivative financial instrument. Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the debt instrument. The resulting discount to the face value of the debt instrument is amortized through periodic charges to interest expense using the Effective Interest Method.
Income Taxes
Under ASC 740 the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Uncertainty in Income Taxes
Under ASC 740-10-25 recognition and measurement of uncertain income tax positions is required using a “more-likely-than-not” approach. The Company evaluates their tax positions on an annual and quarterly basis, and has determined that as of December 31, 2011 no additional accrual for income taxes is necessary.
Earnings (Loss) Per Share of Common Stock
Basic net earnings (loss) per common share (EPS) is computed using the weighted average number of common shares outstanding for the period. Diluted earnings per share include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for the periods presented.
(Loss) Per Share of Common Stock
The following is a reconciliation of the computation for basic and diluted EPS:
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development
Research and development expenses include payroll, employee benefits, equity compensation, and other headcount-related costs associated with product development. The Company has determined that technological feasibility for the software products is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, the Company expenses all research and development costs when incurred. In addition, research and development costs have been included in the consolidated statements of operations for the years ended December 31, 2011 and 2010, respectively.
Recent Issued Accounting Standards
In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. FASB ASU 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820 resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.
In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective for the Company beginning October 1, 2012, with early adoption permitted. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.
In September 2011, FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amended goodwill impairment guidance to provide an option for entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the Company’s results of operations, cash flows or financial position.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 3- FIXED ASSETS
Fixed assets consist of the following as of December 31, 2011 and 2010, respectively:
Depreciation expense was $18,661 and $27,116 for the year ended December 31, 2011 and 2010, respectively.
NOTE 4- COMPUTER SOFTWARE DEVELOPMENT COSTS
Computer software development costs consist of the following as of December 31, 2011 and 2010, respectively:
Amortization expense was $0 and $64,888 for the years ended December 31, 2011 and 2010, respectively.
NOTE 5- NOTES PAYABLE
SBA Loan
On July 22, 2003, the Company and the U.S. Small Business Administration (SBA) entered into a Note (“the Note”) under the SBA’s Secured Disaster Loan program in the amount of $377,100.
Under the Note, the Company agreed to pay principal and interest at an annual rate of 4% per annum, of $1,868 every month commencing twenty-five (25) months from the date of the Note (commencing August 2005). The Note matures July 2034.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 5- NOTES PAYABLE (CONTINUED)
The Company must comply with the default provisions contained in the Note. The Company is in default under the Note if it does not make a payment under the Note, or if it: a) fails to comply with any provision of the Note, the Loan Authorization and Agreement, or other Loan documents; b) defaults on any other SBA loan; c) sells or otherwise transfers, or does not preserve or account to SBA’s satisfaction for, any of the collateral (as defined therein) or its proceeds; d) does not disclose, or anyone acting on their behalf does not disclose, any material fact to the SBA; e) makes, or anyone acting on their behalf makes, a materially false or misleading representation to the SBA; f) defaults on any loan or agreement with another creditor, if the SBA believes the default may materially affect the Company’s ability to pay this Note; g) fails to pay any taxes when due; h) becomes the subject of a proceeding under any bankruptcy or insolvency law; i) has a receiver or liquidator appointed for any part of their business or property; j) makes an assignment for the benefit of creditors; k) has any adverse change in financial condition or business operation that the SBA believes may materially affect the Company’s ability to pay this Note; l) dies; m) reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the SBA’s prior written consent; or n) becomes the subject of a civil or criminal action that the SBA believes may materially affect the Company’s ability to pay this Note. The Company is not in default and current on its obligation. The Company has accrued interest at a rate of $38.90 per day. As of December 31, 2011, the Company has an outstanding principal balance of $347,739. Interest expense on the SBA loan for the years ended December 31, 2011 and 2010 respectively was $13,910 and $14,156, respectively.
Tangiers Investors, LP
On February 26, 2010, the Company entered into a Promissory Note with Tangiers Investors, LP in the amount of $40,000. The $40,000 was the value of services performed for the Company and not for cash paid. The Company has agreed to repay the note in two tranches of $20,000. The initial payment was due April 30, 2010 and the final payment was due June 30, 2010. Interest is calculated at 5% per annum.
In August 2010, upon failure of the Company to pay either of the agreed upon payments, the Company and Tangiers Investors, LP entered into a Forbearance Agreement, which gave the company the option to either repay the entire $40,000 plus interest by October 15, 2010 and issue 50,000 common shares, repay $15,000 plus interest by October 15, 2010 and issue 50,000 common shares with the remaining $25,000 plus interest due by December 31, 2010 or repay the entire $40,000 plus interest by December 31, 2010 and issue 100,000 common shares. As a result of the Company’s failure to comply with the terms of the original forbearance agreement, they entered into a second forbearance agreement, which further extended the time for the Company to pay the $40,000 note. The Company again failed to repay the note by the extended date, and was forced to issue additional shares in December 2010, in accordance with the agreements. Additionally, the Company accrued shares for an additional penalty. Tangiers issued a default notice to the Company on January 20, 2011. As a result of the additional shares the Company was forced to issue to Tangiers due to the non-compliance of the forbearance agreements, the modifications made to the debt instrument, constituted a material modification and as a result, the original debt instrument was extinguished and the new debt instrument was recorded, with the resulting value of the penalty shares reflected as a loss on extinguishment. The Company successfully negotiated a one month extension, and the Board of Directors, on February 26, 2011, authorized the payment of $41,836 to Tangiers Investors LP as payment in full for all interest and principal due under the Note and issue 25,000 shares of the Company’s common stock as payment for Tangiers Investors LP’s forbearance.
Interest expense for the year ended December 31, 2011 was $148.
Other
The Company has entered into three additional notes payable, one for $30,000 that is convertible into shares of common stock at $0.06 per share (500,000 shares) at 8% interest, another note is for $15,000 at 5% interest; and the third is a six month note for $20,000 at 8% interest and the note holder was issued 20,000 shares of common stock at $0.29. The three notes mature during 2012. Total interest expense for the year ended December 31, 2011 on these notes is $3,189 and accrued for at December 31, 2011 is $2,811.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 5- NOTES PAYABLE (CONTINUED)
The note in the amount of $15,000, entered into by the Company with an investor on November 15, 2008, is currently in default. The Company was unable to repay the note due to cash flow and liquidity issues. Efforts to obtain a forbearance agreement have not been successful. In November 2011, the Company was notified by the investor that he was seeking legal resolution and payment for the principal and accrued interest.
The following represent the maturities of the notes payable for the next five years - 2012 - $65,687; 2013- $8,694; 2014 - $9,048; 2015 - $9,417; 2016 - $9,764; and thereafter - $310,129.
NOTE 6- NOTE PAYABLE - RELATED PARTY
In April 2010, the Company entered into two separate promissory notes with the Company’s President who loaned the Company a total of $26,000 on April 16, 2010 and $24,600 on April 30, 2010. Payments of $1,000 per month were to commence July 1, 2010 for five months and the balance due on December 1, 2010. Initially interest was to be calculated at 1.5% per month; escalating to 2.5% per month should the monthly $1,000 payments not be made timely. The Company has not made the required $1,000 payments, thus the interest, effective July 1, 2010 on these notes has been accrued at 2.5% per month in accordance with the note agreements. These notes originally due on December 1, 2010 have been extended through September 30, 2012. Interest expense and accrued interest as of December 31, 2011 for these notes was $2,530 and $3,406, respectively.
NOTE 7- Term Loan
The Company established a line of credit with a bank on July 11, 2006. Due to cash flow issues, the Company stopped making payments against principal and was making interest only and through an agreement with the bank reclassified the Line of Credit into a term loan. The Company has an outstanding balance of $341,587 as of December 31, 2011,
The loan accrues interest at annual interest rates of prime plus ¼ %. Interest expense for the years ended December 31, 2011 and 2010 respectively was $11,256 and $ 11,403. The original line of credit and the subsequent term loan is secured by the Company’s accounts receivables and personally guaranteed by the Company’s President & CEO.
The Company was notified on March 9, 2012, by Citibank, N.A. that their Line-of-Credit loan to the Company was sold on February 29, 2012, to Entrepreneur Growth Capital, LLC, 505 Park Avenue, New York, NY 10022.
NOTE 8- CONVERTIBLE DEBENTURES
On December 23, 2009, the Company entered into a Debenture and Warrant Purchase Agreement pursuant to which Street Capital, LLC, the placement agent, agreed to use its best efforts to provide bridge financing through unnamed prospective purchasers in return for an 8% secured convertible debenture (“Debenture”) in the principal amount of $300,000 at a conversion price of $0.20 per share of the Company’s common stock and equity participation in the form of a class A common stock purchase warrant to purchase an aggregate of up to 450,000 shares of the Company’s common stock with an exercise price of $0.20, and a class B common stock purchase warrant to purchase an aggregate of up to 120,000 shares of the Company’s common stock, with an exercise price per share equal to $0.50. On July 9, 2010, the exercise price was changed to $0.20 as the Company failed to convert or repay the instrument by the due date of June 23, 2010. The Company received $150,000 of the $300,000 total principal on
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 8- CONVERTIBLE DEBENTURES (CONTINUED)
December 23, 2009 and entered into two additional debentures for $100,000 and $10,000 for a total of $110,000 in April 2010 with two private investors.
The Company also entered into a Security Agreement pursuant to which it granted to the Debenture holders a first lien against all of its assets, including its software, as security for repayment of the Debenture. As a result of the Company raising $260,000 of the $300,000 in proceeds, they issued a total of 390,000 class A and 104,000 class B warrants to the respective parties. In accordance with ASC 470-20, the Company separately accounted for the conversion feature and recognized each component of the transaction separately. As a result, the Company recognized a discount on the convertible debenture in the amount of $170,125 that was amortized over the life of the convertible debentures which was six-months on each debenture.
The Company recognized the discount as a derivative liability, and in accordance with the ASC, values the derivative liability each reporting period to market. The Company has recognized a loss of $39,628,463 and $121,953 in the years ended December 31, 2011 and 2010 due to the beneficial conversion of the various instruments. The convertible debentures were to mature from June 2010 to October 2010. The Company entered into an Amendment to Debenture and Warrants which extended the due date of the original $150,000 debenture from June 2010 to August 31, 2010, and then amended the exercise price of the Class B warrants from $0.50 to $0.20 on July 9, 2010.
There were a total of three entities that invested money in the Company and received convertible debentures.
The original debenture holder investment was in the amount of $150,000, which subsequently was forced to be amended a total of four times from its original expiration date due to the company’s inability to repay the entire principal. The first amendment extended the debenture to August 31, 2010 and in exchange the company gave to the holder 200,000 shares of common stock and reduced the Series B warrant exercise price from $.50 cents to $.20 cents/share. The second amendment extended the debenture to October 31, 2010 and in return the Company gave to the holder a total of 150,000 shares of common stock and 150,000 series C warrants that had an exercise price of $.40 cents/share. The Company entered into a Third Amendment on November 1, 2010, that further extended the repayment date of the $150,000 Convertible Debenture to April 30, 2011 and issued 150,000 shares of common stock as a penalty. The Company failed to comply with the new maturity date of April 30, 2011 and as a result agreed to issue 300,000 shares of common stock and reduce the Class C warrants exercise price from $0.40 to $0.20; further the Debenture holder agreed that the penalty payment would include all accrued and unpaid interest through the new due date of April 30, 2012. The fourth and latest amendment extends the debenture until April 30, 2012 and in return the Company has given to the holder 300,000 shares of common stock and lowered the exercise price of the Class A and C warrants to $.20/share as well has provided to the holder a provision that allowed for cashless exercise of those warrants. The payment of the 300,000 shares also includes all interest that will be expensed from May 19, 2011 until April 30, 2012. The anticipated amount of interest that will be expense to the holder until April 30, 2012 is shown on the balance sheet as ‘Prepaid expenses’. As of today this particular note holder who originally invested $150,000 has received a total of 800,000 shares of common stock (excluding all accrued interest paid in common stock) and 150,000 warrants as payments for extending the debenture agreement from its original expiration date until April 30, 2012. The debenture holder has currently converted all A, B, & C warrants and $100,000 in principal leaving a total of $50,000 that the Company still owes to the holder. As of December 31, 2011, the Company has accrued an additional 450,000 shares of common stock as a penalty.
The second debenture has been amended from its original maturity date to September 30, 2011. The Company extended the debenture from its original date of October 31, 2010 to April 1, 2011 by issuing the holder 10,000 Class C warrants and issuing 10,000 penalty shares. The Company was forced to issue the Class C warrants in addition to the shares of common stock, due to the non-compliance of the agreements. The modifications made to the debt instruments, constituted a material modification and as a result, the original debt instrument was extinguished and the new debt instrument was recorded, with the resulting value of the penalty shares and warrants reflected as a loss on extinguishment. In exchange for the debenture holder extending the debenture from April 1, 2011 to September 30, 2011 the Company issued 10,000 shares of common stock. In July 2011, this debenture holder converted all $10,000 worth of principal into shares of common stock.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 8- CONVERTIBLE DEBENTURES (CONTINUED)
The third and final debenture holder invested $100,000 and received 150,000 Series A warrants and 40,000 Series B warrants. The entire debenture agreement originally expired on October 31, 2010, but due to the Company’s inability to repay the entire principal by that date, the Company had to amend the expiration of the agreement a total of two times. The first amendment extended the debenture to April 1, 2011 and in return the Company paid to the holder 100,000 shares of common stock and 100,000 Class C warrants that have an exercise price of $.40 cents/share. The Company has entered into its second amendment, which is reflected in the financial statements, which extends the debenture to April 2, 2012 and in return the Company paid to the holder 100,000 shares of common stock. As of this filing date the holder has not converted any principal or warrants and has not been paid any interest. This debenture holder notified the Company on April 2, 2012, that he would not extend his note and thus made notice to the company for the full payment of principal and accrued and unpaid interest. The Company was unable to repay the principal. On April 13, 2012 the Company filed an 8K to announce that Rahul Argade, the debenture holder, notified InferX that it was in default under the terms of the Debenture for failure to repay the principal amount of $100,000 plus interest due.
Street Capital LLC, notified the Company on April 30, 2011 that it have assigned all rights of the Debenture to Fourth Street Fund LP. Subsequently, on May 19, 2011 Fourth Street Fund LP exercised its right under the terms of the Debenture to convert $30,000 of principal for 150,000 shares of common stock and receive payment for accrued and unpaid interest in the amount of $3,466 in exchange for 17,333 shares of common stock. Fourth Street Fund LP, notified the Company on December 5, 2011 that it was exercising its right under the terms of the Debenture to convert $50,000 of principal for 250,000 shares of common stock. Street Capital LLC, one of the original Debenture Holders, notified the Company on January 1, 2012 that it was exercising its right under the terms of the Debenture to convert $20,000 of principal for 100,000 shares of common stock and receive payment for accrued and unpaid interest in the amount of $12,855 in exchange for 64,274 shares of common stock. The remaining principal associated with Debenture Holder Fourth Street Fund LP is $50,000, and interest is prepaid through the maturity date of April 30, 2012.
As a result of a dilutive issuance of shares on December 1, 2010 that was not disclosed to the holders of debentures issued by the Company, the sale of 1,000,000 shares of common stock in December 2010 to an investor for $0.002 per share triggered rights under the debentures to convert debt into common stock at the same price. The Debentures were convertible into shares of common stock at a conversion price equal to $0.20 per share (the "Initial Conversion Price"). The Debentures also provided that, in the event the Company sold any common stock or other equity securities at an effective price per share that was lower than the Initial Conversion Price (a "Dilutive Issuance"), the Initial Conversion Price for the Debenture holders would be reduced to the lower price per share charged in connection with the Dilutive Issuance.
Without knowledge of the Dilutive Issuance, one of the debenture holders (Street Capital) sent notices of conversion on January 19, 2011, May 19, 2011 and December 5, 2011. On each occasion, the Company honored the holder’s conversion request but utilized the Initial Conversion Price of $0.20 instead of the Base Conversion price of $0.002 per share. As a result of the Company's failure to apply the Base Conversion Price listed in the debenture, conversions on January 19, 2011, May 19, 2011 and December 5, 2011, the Company failed to issue 57,737,870 shares of common stock due to Street Capital. Fourth Street Fund whom was assigned this debenture from Street Capital, waived any claim to any shares of the Company's common stock over the number of shares that were actually delivered, and agrees that the amount of debt due under the debenture was converted as a consequence of those conversions was as stated on the conversion notices. With respect to the December 2011 conversion, the amount actually converted was $500 rather than the original $50,000 as stipulated on the conversion notice as a result of the conversion price being adjusted from $0.20 to $0.002 per share. The balance due as of December 31, 2011 to Fourth Street Fund is $99,500.
Additionally, with the change in conversion price to $0.002, and the fact that at December 31, 2011, the Company has a closing stock price of $0.40, this resulted in a significant beneficial conversion feature in these instruments that has been recorded as a derivative liability by the Company in the amount of $38,703,000 of the total $39,628,463 change in the fair value of the derivative liability during 2011. In 2012, as the common stock price has dropped considerably, the majority of this liability has been removed.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 8- CONVERTIBLE DEBENTURES (CONTINUED)
The modifications made to all three debt instruments, constituted a material modification and as a result, the original debt instrument was extinguished and the new debt instrument was recorded, with the resulting value of the penalty shares and warrants are reflected as a loss on extinguishment.
As of December 31, 2011, the Company has $199,500 outstanding in convertible debentures with two debenture holders.
Interest expense for the years ended December 31, 2011 and 2010 were $18,407 and $18,203, respectively. As of December 31, 2011, accrued interest on the convertible debentures is $13,631.
NOTE 9- CONVERTIBLE PREFERRED STOCK AND WARRANTS - SERIES B
In June 2011, the Board of Directors authorized the issuance of up to 1,100,000 shares of Series B 10% convertible voting preferred stock (“Series B Shares”) having a stated value of $.50 per share. The Series B shares are valid for 24 months from the date of issuance and are convertible at any time, at the option of the holder, into common shares at a rate of 1:1. Interest will be paid annually, either in cash or in common stock at the Company’s discretion based on the 30 day bid-price moving average. At the end of the 24 month term the Company will convert all outstanding Series B Shares and pay all outstanding interest in cash or in common stock based on the 30 day bid-price moving average.
In addition to the convertible preferred shares, each purchaser of the Series B Preferred Stock was issued an equal number of warrants (“Series B Warrants”) to purchase common stock at a price of $.75 per share that expire two years from the issued date.
On September 27, 2011 the Board of Directors reduced the purchase price per share of convertible preferred stock from $.50 to $.40 cents per share, thereby increasing the authorized number of Series B Shares from 1,100,000 to 1,500,000. All Series B investors as of September 27, 2011 were issued both convertible preferred shares and associated warrants equal to the difference between the number of shares they received at the purchase price of $.50 per share and the new $.40 per share price.
Upon any liquidation or dissolution of the Company, the Series B shareholders shall be entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to 100% of the stated value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages owing thereon, for each Series B share before any distribution or payment shall be made to the holders of any other securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Series B shareholders shall be ratably distributed among the Series B shareholders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.
In the year ended December 31, 2011, the Company issued a total of 906,250 Series B shares at $.40 per share to accredited investors in private placement for a total of $362,500.
As a result of the mandatorily redeemable nature of the Series B shares after 24 months and the fact that redemption of the Series B shares is completely outside of the Company’s control, aside from its liquidation or termination, the Company has classified the Series B shares outside of shareholders’ equity and in mezzanine (temporary) equity in accordance with ASC 480-25-4 regarding distinguishing liabilities from equity for mandatorily redeemable financial instruments.
The Company accounted for the Series B Warrants as embedded derivatives that are required to be bifurcated from the carrying value of the equity instrument (Series B Shares). The relative fair value of all the Series B Warrants at their relative issue dates totaled $171,963 is shown as a discount to the Series B Shares and will be amortized evenly over the 24-month life of the shares. As of December 31, 2011, the remaining discount on the Series B Preferred Stock is $131,192 and is reflected on the consolidated balance sheet, net of the total proceeds of $362,500 at a value of $231,308. In event that the holder converts any portion of their shares prior to the deadline, the appropriate remaining discount will be expensed immediately.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 9- CONVERTIBLE PREFERRED STOCK AND WARRANTS - SERIES B (CONTINUED)
The Company accounted for the beneficial conversion feature (“BCF”) of the Series B Shares at fair value and is shown as part of the derivative liability. The value of the BCF now that the per share purchase price was reduced from $.50 to $.40 cents is $289,963 and will be adjusted quarterly. The initial step of the calculation was the determination of the Black-Scholes value assuming no dividends, a risk-free interest rate of 1.25%, annualized volatility between 260% and 316%, and expected warrant life of two years. The next step was apportioning the percent of the fair value of the Series B Shares to the fair value of the Series B Shares and Warrants (52.9%) to the proceeds received ($362,500). This then provided enough information to determine the effective BCF of the Series B Shares. The relative fair value of all the proceeds received at their specific inception dates is as follows: Series B Preferred: $190,538; Series B Warrants: $171,963.
On March 6, 2012, the Company received an investment of $100,000, and issued an additional 250,000 units of the Company’s Series B offering consisting of (i) 10% convertible redeemable preferred stock (“Series B Preferred Stock”) of InferX Corporation with a purchase price of $0.40 that are convertible into shares of the Company’s common stock, at $0.40 per share, and (ii) a warrant exercisable for two years for that number of shares into which each warrant converts equal to the number of Series B Preferred Stock purchased, and having an exercise price of $0.75 per warrant share. As of April 19, 2012, and currently, the Company has issued a total of 1,156,250 Series B shares at $0.40 per share to accredited investors in private placement for a total of $462,500. To date none of the Series B Preferred Stock has been converted to shares of common stock, nor any warrants exercised.
On October 10, 2012, the Board of Directors resolved to reduce from $0.40 to $0.07 per share the conversion price of these Series B Preferred Shares and re-reprice the warrants from $0.75 to $0.20 to the eight purchasers of the 1,156,250 Series B Preferred Shares units.
NOTE 10- STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
The Company was incorporated on May 26, 2005, and the Board of Directors authorized 10,000,000 shares of preferred stock with a par value of $0.0001. The Company as of December 31, 2009 has authorized the issuance of 2,000,000 shares of preferred stock. 1,000,000 of the shares were authorized to be issued to Vijay Suri in connection with the Merger Agreement, and 1,000,000 shares of preferred stock were authorized to be issued to B.K. Gogia the former CEO upon his resignation as CEO. The Company and Vijay Suri and B.K. Gogia on June 2, 2010, agreed to rescind the issuance of the preferred stock. As a result of the recession, the Company and its officers agreed to issue them each 1,000,000 shares of common stock for their personal guarantees of certain debt of the Company.
Common Stock
The Company was incorporated on May 26, 2005, and since then the Board of Directors authorized 75,000,000 shares of common stock with a par value of $0.0001. On March 13, 2009, the Company’s Board of Directors approved the increase of the authorized shares of common stock to 400,000,000.
From January 1, 2009 through October 27, 2009, the period prior to the reverse merger with Irus Group, the following transactions occurred:
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
·The Company effectuated a reverse 1:20 stock split. All shares of common stock have been reflected with the 1:20 reverse split, retroactively in accordance with SAB Topic 14C;
·1,875,000 shares of common stock were issued in conversion of $393,500 in convertible notes, interest and warrants that were issued with the convertible notes;
·617,500 shares of common stock were issued for cash in the amount of $135,000;
·187,500 shares of common stock were issued for services rendered valued at $53,000;
·232,940 shares of common stock were issued in connection with the exercise of warrants issued in the prior financing that InferX completed in 2007. The Company valued these warrants at $2,236,224, which is what the exercise price would have been had the warrants been exercised for cash. The Company provided the warrant holders a cashless exercise as a result of the Merger; and
·100,750 shares of common stock were issued in the exercise of stock options for $0, as a result of the Merger, no cash was required.
The transactions resulted in the Company going from 886,955 shares issued and outstanding to 3,920,645 shares.
Additional items impacting equity prior to the reverse merger were:
·Conversion of accrued interest to additional paid in capital in the amount of $45,913; and
·Conversion of accrued compensation to related parties to additional paid in capital, as a result of their forgiveness of the accrued compensation in the amount of $524,226.
The Merger Agreement called for the Company to issue 9,089,768 shares of common stock in exchange for 100% of the shares of Irus Group. Post-merger, the Company recognized $877,060 in stock based compensation for the year ended December 31, 2009.
During the year ended December 31, 2010 the Company has issued 13,372,351 shares of common stock as follows: 9,089,768 shares that were issued for the 100% exchange in the Irus transaction; 300,000 shares for services rendered that were also previously recorded as a liability for stock to be issued; 142,500 shares under a pledge agreement with Tangiers L.P.; and 5,000 shares for services rendered that were previously recorded as a liability for stock to be issued; and the Company cancelled a net of 5,000 shares (issued 45,000 shares and cancelled 50,000 shares); 90,083 shares to pay an existing accounts payable, 2,300,000 shares recorded as a liability for stock to be issued; 350,000 shares for late fees associated with missed payments; 1,000,000 shares for cash in the amount of $2,000; and 100,000 shares for late fees associated with missed payments. The Company has an outstanding liability for stock to be issued, net of issuances of shares that reduced the liability of $44,750 at December 31, 2010. The Company recorded an additional $289,835 in stock based compensation, which includes $25,491 related to the Class C warrants that were reclassified as loss on extinguishment of debt.
During the year ended December 31, 2011 the Company issued 2,705,207 shares of common stock as follows: 245,000 as a conversion of outstanding liability for stock to be issued in the amount of $44,750; 302,220 in exchange for $68,000 dollars; 81,092 shares were issued for the conversion of two accounts payable balances totaling $21,082; 300,000 shares were issued for legal services and 8,000 were issued to the Company’s Chief Technology Advisor for a total value of $62,560; 510,000 shares were issued to extend the maturity dates of the convertible debentures valued at $206,000; 983,002 shares were issued when the principal of convertible debentures and convertible note payables were converted to shares along with their outstanding interest valued at $98,581; 250,893 shares were issued when 435,000 warrants were converted to common stock valued at $8,998; and 25,000 shares were issued to two employees valued at $7,500. The Company also recognized $606,809 for the fair value of warrants and options vested in 2011.
The Company as of December 31, 2011 had 19,998,203 shares of common stock issued and outstanding.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
Warrants
The Company prior to the reverse merger with Irus Group converted all of their previous issued and outstanding warrants from the private placement completed in 2007 as well as the warrants issued with the convertible notes.
The Company issued 225,000 Class A warrants and 60,000 Class B warrants in connection with the convertible debenture on December 23, 2009. The Class A warrants have an exercise price of $0.20 per share and the Class B warrants have an exercise price of $0.50 per share. All warrants have a term of five years. The value of the warrants at inception was $98,130 which represented the debt discount. The Class B warrants’ exercise price was amended on July 9, 2010 to a price of $0.20 due to the Company’s failure to convert or repay the instrument by June 23, 2010.
The Company issued 15,000 Class A warrants and 4,000 Class B warrants to an individual investor in connection with the convertible debenture first entered into on April 1, 2010. The Class A warrants have an exercise price of $0.20 per share and the Class B warrants have an exercise price of $0.50 per share. All warrants have a term of five years. The value of the warrants at inception was $8,855 which represented the debt discount.
The Company issued 150,000 Class A warrants and 40,000 Class B warrants to an individual investor in connection with the convertible debenture first entered into on April 19, 2010. The Class A warrants have an exercise price of $0.20 per share and the Class B warrants have an exercise price of $0.50 per share. All warrants have a term of five years. The value of the warrants at inception was $63,140 which represented the debt discount.
The Company issued 150,000 warrants to an investment banker as part of their overall compensation package to raise funds for the Company. The warrants have an exercise price of $0.20 per share and expire in five years. These warrants have vested as of December 31, 2010, and have recorded $28,402 as of December 31, 2010 in stock-based compensation.
The Company issued 900,000 warrants to an investment consultant as part of their overall compensation package to raise funds for the Company. These warrants have an exercise price of $0.20 per share and expire in five years. These warrants vest with 400,000 over one year beginning in July 2010, and the balance of 500,000 warrants vest based upon achievement of performance objectives mutually agreed between the Company and the Consultant. The Company incurred $26,933 in stock-based compensation expense to record the first two scheduled vestings of 100,000 warrants in July 2010 and October 2010. The third scheduled vesting occurred in January 2011 and the $18,997 was recorded as stock based compensation in the twelve months ended December 31, 2011. The contract was terminated on February 25, 2011 and 300,000 warrants are vested and the remaining 600,000 warrants are forfeited.
The Company issued 4,500,000 warrants to B.K. Gogia as part of his overall compensation package. These warrants have an exercise price of $0.20 per share and expire in five years. These warrants vest based upon achievement of performance objectives mutually agreed between the Company and the Employee and the stock price being not less than $0.50 per share. None of these warrants have vested as of December 31, 2011.
The Company issued 300,000 warrants to an individual in exchange for services previously rendered and recorded. These warrants have an exercise price of $0.20 per share, expire in five years and became fully vested in April 2010. The values of these warrants were $104,736.
As a result of the Company’s failure to comply with the repayment terms of the three convertible debentures, the Company issued Class C Warrants to the three debenture holders. The Company issued a total of 260,000 Class C Warrants with an exercise price of $0.40 and a five year term. The value of these warrants has been expensed and classified as a loss on extinguishment of debt due to the fact that it was considered a material modification of the debt instrument. This value is $25,491 on the Class C Warrants.
The Company issued a total of 906,250 warrants as part of the transaction associated with the sale of the Convertible Preferred Series B shares at a price of $.75 per share that expire 2 years from the issued date (see Note 9).
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
In September 2011 one convertible debenture holder exercised all their A, B, & C warrants via cashless exercise thus decreasing the total warrants outstanding amount by 435,000.
In December 2011, the Company issued a total of 500,000 Warrants with an exercise price of $0.45 and a five year term. The value of these warrants has been expensed and classified as stock based compensation. The value for these warrants is $170,000.
During the year ended December 31, 2011, the Company issued total of 1,406,250 warrants. Of the total warrants issued, 435,000 have been converted / exercised as of December 31, 2011.
The following is a breakdown of the warrants:
The warrants have a weighted average price of $0.29.
Options
Since October 2007, the Company’s Board of Directors and Shareholders approved the adoption of an option plan for a total of 5,000,000. The Company prior to the reverse merger with Irus exercised all of the options that were outstanding at the time. Subsequent to the reverse merger, the Company issued stock options in connection with certain employment agreements. The Company granted 5,939,500 options, 5,119,500 are vested, and none of which have been exercised as of December 31, 2011. Of the 5,939,500 that were granted only 820,000 remain unvested, and these vest on a varying schedule with the last date being June 30, 2013.
During the year ended December 31, 2011, the Company granted an additional 805,000 options. Of this amount, 425,000 vested as of December 31, 2011. None of these options have been exercised as of December 31, 2011.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
These options have exercise prices that range from $0.06 to $0.50 and were valued based on the black-scholes model with the following criteria:
The value attributable to these options that vested for the years ended December 31, 2011 and 2010 is $254,843 and $104,276, respectively and is reflected in the consolidated statements of operations as stock based compensation.
NOTE 11- COMMITMENTS
Office Lease
The Company leases office space in Sterling, Virginia pursuant to a lease with a related party through common ownership related to the President & CEO, which is currently month to month. The lease provides for an annual rental of approximately $78,000.
Rent expense for the years ended December 31, 2011 and 2010 was $86,722 and $88,665, respectively.
Board of Advisors Agreements
The Company’s board of directors approved the addition of two members to its Board of Advisors. Each of these members will provide assistance to the Company with respect to their healthcare solution and predictive technology to prospective banking, insurance and healthcare customers. As consideration for the placement on the Board of Advisors, the Company has, in addition to quarterly cash payments, granted those Advisors options under their 2007 Stock Incentive Plan that vest over a two-year period of time commencing in May 2010. Per agreement with one of the Board of Advisors members, the Company has not made the quarterly cash payments owing to that Advisor due to cash flow and liquidity issues. The Company has included these fees in their consolidated statements of operations for the years ended December 31, 2011 and 2010.
Consulting Agreements
The Company has entered into consulting agreements with marketing and strategic consulting groups with terms that do not exceed one year. These companies are to be paid fees for the services they perform. The Company has included these fees in their consolidated statements of operations for the years ended December 31, 2011 and 2010.
On January 26, 2010, the Company entered into an agreement with Coady Diemar Partners, LLC, an investment banker in connection with investment banking services. Pursuant to the agreement, Coady Diemar Partners, LLC received a retainer of $30,000 payable in two tranches of $15,000 and receive 150,000 warrants as well as receive an 8% fee on amounts raised. The term of the agreement was one-year. The warrants did not vest until June 2010. Subsequently the consulting agreement has been terminated. As of December 31, 2011 none of the warrants have been exercised.
In June 2010, the Company entered into a consulting agreement with a company to provide financial services and locate potential investment opportunities. The term of the agreement was for one-year, and the consultant would receive monthly payments of $7,500 as well as be issued 300,000 shares of restricted common stock, and 900,000 warrants that vest over the one-year period and upon certain financing criteria being met. As of December 31, 2011, 300,000 of the warrants have vested. The agreement with the consultant was terminated before the one-year anniversary and 600,000 of the 900,000 warrants will never vest. The Company has included these fees in their consolidated statements of operations for the year ended December 31, 2011. The agreement terminated in February 2011, and the remaining 600,000 unvested warrants have been cancelled.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 11- COMMITMENTS (CONTINUED)
In December 2010, the Company entered into an agreement with Strategic Universal Advisors, LLC (formerly Strategic Global Advisors, LLC,) a firm that provides investment and public relations consulting firm services. Pursuant to the agreement, Strategic Universal Advisors, LLC received a contract in the amount of $90,000 payable in monthly payments of $7,500 and receive 500,000 options to purchase the Company's common stock that vest on the date of grant. The options were valued at $34,994. The Company has included these fees in their consolidated statements of operations for the year ended December 31, 2011. The term of the agreement is one-year. The agreement expired without renewal on December 12, 2011.
On March 2, 2011, The Board of Directors entered into an agreement with Assured Value Advisors, Inc. a merchant and investment banking services consultant in connection with investment banking services. Pursuant to the agreement, Assured Value Advisors, Inc. would receive 500,000 options to purchase shares of the Company's common stock; of which 300,000 have vested ($122,082 in 2011 stock based compensation), and the remaining 200,000 options will vest in the first quarter of 2012.
On March 28, 2011, The Board of Directors granted two employees 45,000 options to purchase shares of the Company's common stock; all of which vested upon grant. Employees’ grant of options was based on achievement of performance milestones. The vested options were valued at $13,370. The Company has included these fees in their consolidated statements of operations for the year ended December 31, 2011.
On May 2, 2011, The Board discussed and authorized the consulting agreement with a consultant to provide comprehensive technical strategy assessment. The consulting contract was executed for a two-month period and the Board authorized a consulting fee of $8,000 and that the Company should issue the consultant 8,000 shares under the consulting agreement. Subsequently the Agreement was extended for an additional three months and the Company issued the consultant 8,000 additional shares under the agreement.
In July 2011, the Company entered into a business development and marketing agreement with Mountaintop Marketing Group, LLC, a firm that provides specialized marketing, advertising and business development services to private industry wishing to do business with the federal government. Pursuant to the agreement, Mountaintop Marketing Group, LLC, received a contract in the amount of $95,000 payable in 13 installments of initial $5,000 set-up fee and 12 monthly payments of $7,500, and receive 35,000 shares of the Company's common stock that is to be paid 17,500 shares at the conclusion of first six months of the contract and 17,500 shares at conclusion of 1 year of the contract start date. The Company has included these fees in their consolidated statements of operations for the year ended December 31, 2011. The term of the agreement is one-year. The Company has been notified that it is in default of the contract with Mountaintop Marketing Group in the amount of $45,000. The Company disputes these claims and continues to negotiate resolution of this matter. The Company has not issued any of the shares of common stock associated with this agreement.
Employment Agreements
During the year ended December 31, 2009, the Company entered into four separate employment agreements with their key executives. The employment agreements range in years from three to five, and require the Company to compensate the key executives for a base salary, as well as provide for incentive compensation. In addition, the executives were granted in total 3,250,000 stock options that vest through December 2011. The Company also entered into another employment agreement in January 2010 which granted an additional 20,000 options to an employee. This agreement was for a period of two years. The Company granted an additional 750,000 options to two employees at $0.06 on November 30, 2010. These options were not part of the original employment agreements; however the board of directors did approve their issuance. In August and September 2011 the Company hired two employees who are to receive 200,000 options that vest equally over the next eight quarters and 60,000 options that vest equally over the next four quarters, respectively. As of December 31, 2011 a total of 80,000 options from these two employment agreements have vested and were valued at a total of $25,688. The Company has included these fees in their consolidated statements of operations for the year ended December 31, 2011.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 12- PROVISION FOR INCOME TAXES
Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
At December 31, 2011, deferred tax assets consist of the following:
At December 31, 2011, the Company had net operating loss carry forward in the approximate amount of $4,413,095, available to offset future taxable income through 2031. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the years ended December 31, 2011 and 2010 is summarized below.
NOTE 13- RELATED PARTY TRANSACTIONS
The Company has a rent expense in the amount for the years ended December 31, 2011 and 2010 of $86,722 and $88,665, respectively to a company owned by a relative of the President & CEO of the Company. In addition, the Company has outstanding fees due the President & CEO of $725,000 as of December 31, 2011 relating to past due distributions prior to the reverse merger. Further, the Company entered into two separate promissory notes with Vijay Suri during April 2010, in which Mr. Suri loaned the Company a total of $26,000 on April 16, 2010 and $24,600 on April 30, 2010. The notes were due on December 1, 2010, however, have been extended through September 30, 2012.
NOTE 14- MAJOR CUSTOMERS
The Company has derived 88% and 95% of its revenue and accounts receivable for the years ended December 31, 2011 and 2010 from three customers.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 15- FAIR VALUE MEASUREMENTS
The Company adopted certain provisions of ASC Topic 820. ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
Level 1 inputs: Quoted prices for identical instruments in active markets.
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 inputs: Instruments with primarily unobservable value drivers.
The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011:
NOTE 16- SUBSEQUENT EVENTS
On May 6, 2011, the Board of Directors authorized that the Company issue 33,750 shares of the Company's common stock to a vendor, Anshul Mohaan who is willing to convert $6,750 of accounts payable owed to him. The stock was authorized but not issued by December 31, 2011; and subsequently has been issued.
On February 13, 2012, the Company entered into a “Sales Outsourcing Agreement” with Stanley Altschuler to provide direct sales support and closure to pre-determined list of clients. Pursuant to the agreement, Stanley Altschuler, would receive compensation that includes a Common Stock Purchase Warrant to purchase 500,000 shares of Common Stock exercisable for five years at $0.45 per share and vest immediately. Additionally, the Agreement provides for “Success Fee” paid to Agent calculated as 10% of gross license revenue and 3.5% of gross services / professional services revenue on sales contracts resulting directly from actions of the Agent. Stanley Altschuler is also a member of Strategic Universal Advisors, LLC, a firm which has a contract with the company to provide investment and public relations consulting services to the Company. The term of the Sales Outsourcing Agreement is one-year.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 16- SUBSEQUENT EVENTS (CONTINUED)
In November 2008, the Company entered into a convertible note with Mr. Prem Dadlani, in the amount of $15,000, with a term of six months. The Company was unable to repay the note due to cash flow and liquidity issues. Efforts to obtain a forbearance agreement have not been successful. In November 2011, Mr. Dadlani through legal counsel has sought resolution and payment. In an effort of good faith negotiations with Mr. Dadlani, The Board of Directors authorized, on February 24, 2012, that the Company issue 100,000 shares of the Company's common stock in exchange for a forbearance agreement in which the unpaid principal and accrued interest be extended until June 30, 2012. Subsequently, since the shares authorized on February 24, 2012 were not issued, the Board of Directors authorized, on October 10, 2012, that the Company issue 400,000 shares of the Company’s common stock as consideration for a forbearance agreement and to extend the maturity date of his note to April 30, 2013.
On February 24, 2012, the Company entered into a consulting agreement with Manish Nandy, to provide marketing and proposal development services to support several Company customer initiatives. The term of the agreement is for three months, and the consultant will receive a payment of $6,500. At the discretion of the Company the Consultant can be paid up to $5,000 of the payment in shares of common stock @ $0.40 per share.
On February 24, 2012, the Board of Directors approved the loan of a related party, Vijay Suri, President & CEO, in the amount of $8,750 for the specific purposes of financing critical payroll and other payment obligations. The Board authorized the Company to issue a third Promissory note with a principal amount of $8,750 with interest to accrue at 5% per annum; and payable in six months. Further, since the Company has been unable to repay any amounts toward principal related to Mr. Suri’s promissory notes, The Company was forced to reset the interest rate to the penalty rate of 5%. Total principal owed to Vijay Suri from three promissory notes issued by the Company is $59,350, not including accrued and unpaid interest.
On February 24, 2012, the Board of Directors approved the payment $7,500 per month, in the form of a warrant to purchase 112,500 shares of common stock @ $0.40 per share; for unpaid legal services performed from July 1, 2011 until December 31, 2011, and approved the continuation of legal services provided by current corporate legal counsel.
Due to the Company’s need for additional financing, the Board of Directors on February 24, 2012, approved the receipt of investment funds from two new investors in the amount of $20,000 each. The investments are in the form of an 8% promissory note due in six months, on June 22 and July 22 2012, respectfully. Additionally, the note holders received upon issuance of the Note, 20,000 shares of the Company’s common stock, par value $0.0001 per share. The Company also agreed that should the Company fail to pay interest and principal due at the maturity date, the Note Holder shall receive an additional 40,000 shares of Common Stock. The Company received on December 22, 2011, $20,000 under a promissory note from an individual; then the Company received another $20,000 on January 22, 2012, under a promissory note similar to the one received on Dec 22, 2011.
In an effort to obtain required equity or debt financing for technology development, market penetration and revenue growth, the Board of Directors have sought additional financing, therefore on February 24, 2012, the Board of Directors approved entering into discussions with three different investment groups for the purposes of obtaining additional financing. The Board of Directors approved the Company entering into a term sheet with Joseph Capital LLC. dated December 27, 2011; further the Board approved the Company entering into an engagement agreement dated January 23, 2012 with Strategic Research Associates, Inc.; and the Board also approved the Company entering into a term sheet with Anomaly Analytics, LLC. dated February 14, 2012. To date no final term sheet has been accepted, nor any final agreement for financing has been reached with any of these firms, the Company has terminated discussions with these firms.
On March 6, 2012, the Company received an investment of $100,000, and issued an additional 250,000 units of the Company’s Series B offering consisting of (i) 10% convertible redeemable preferred stock (“Series B Preferred Stock”) of InferX Corporation with a purchase price of $0.40 that are convertible into shares of the Company’s common stock, at $0.40 per share, and (ii) a warrant exercisable for two years for that number of shares into which each warrant converts equal to the number of Series B Preferred Stock purchased, and having an exercise price of $0.75 per warrant share. As of April 19, 2012, the Company has issued a total of 1,156,250 Series B shares at $0.40 per share to accredited investors in private placement for a total of $462,500. To date none of the Series B Preferred Stock has been converted to shares of common stock, nor any warrants exercised.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 16- SUBSEQUENT EVENTS (CONTINUED)
The Company was notified on March 9, 2012, by Citibank, N.A. that their Line-of-Credit loan to the Company was sold on February 29, 2012, to Entrepreneur Growth Capital, LLC, 505 Park Avenue, New York, NY 10022. Through this action the line of credit is terminated and is now a term loan secured by the Company’s assets, accounts receivables, and the personal guarantee by the Company’s President & CEO, per the terms of the original agreement and stipulated by Entrepreneur Growth Capital, LLC through the acquisition of the note from Citibank. The Company is in discussions with Entrepreneur Growth Capital, LLC to determine the new payment and interest schedule for this loan.
The Board of Directors, on March 13, 2012 authorized the Company grant to Dr. Jerzy Bala, the Chief Technology Officer, a Common Stock Purchase Warrant to purchase 1,000,000 shares of the Company's common stock, such shares of the warrant to vest immediately upon grant at an exercise price of $.30 per share that are exercisable for a period of five years from the date of grant. The Board of Directors also authorized that the Company grant a Common Stock Purchase Warrant to purchase 150,000 shares of its common stock to another Company employee in recognition of his contributions to the Company. Such shares of the warrant are to vest 50,000 shares on March 13, 2012, and 50,000 shares on the first and second anniversary dates of issue, at an exercise price of $.30 per share that are exercisable for a period of five years from the date of grant.
On March 18, 2012, the Company entered into a consulting agreement with Amrit Chase, to provide financial services to support the document and financial preparation for the Company’s 2011 10K filing. The term of the agreement is for three months, and the consultant will receive two monthly payments of $5,000 as well as be issued 150,000 shares of common stock.
On April 3, 2012, the company was notified of a Warrant In Debt had been filed in the General District Court of Fairfax County, Virginia, by PCT Law Group, PLLC, to appear in General District Court of Fairfax County, Virginia on April 30, 2012 in the matter to resolve unpaid debt in the amount of $12,156 plus attorney’s fees and court costs. The Company received a Garnishment Summons dated November 14, 2012 from the Court of Fairfax County, Virginia for the unpaid amount plus interest, judgment costs, and attorney fees for a total of $16,883.69. Although the Company disputes the amount outstanding, the Company is in negotiations with PCT Law Group, PLLC for settlement.
On April 13, 2012 the Company filed a Form 8-K with the Securities and Exchange Commission notifying shareholders that on April 6, 2012, as a result of a deadlocked Board of Directors the following employees submitted their letter of resignation as employees of the Company: B.K. Gogia, President, Technology Solutions Group, Raimondo Piluso, COO and Vice President of Business Development, Jerzy Bala, CTO, and Rahul Argade, Senior Director. B.K. Gogia maintained his position as Chairman of the Board of Directors. Subsequently, Jerzy Bala, CTO and Rahul Argade, Senior Director rescinded their resignations based on the strategy and direction presented by the former CEO, Vijay Suri.
Additionally, in the April 13, 2012 Form 8-K filing the Company informed shareholders that on April 12, 2012 Rahul Argade, the holder of an 8% secured convertible debenture, issued pursuant to a Debenture and Warrant Purchase Agreement dated December 23, 2009, notified the Company that it was in default under the terms of the Debenture for failure to repay the principal amount of $100,000 plus interest due, and that he would be exercising his default remedies under the Debenture, including the default interest rate of 22% on the unpaid principal balance effective as of April 7, 2012. The Debenture is secured by all assets of the Company, including its intellectual property.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 16- SUBSEQUENT EVENTS (CONTINUED)
On July 23, 2012, the Company filed a Form 8-K with the Securities and Exchange Commission notifying shareholders that Mr. Vijay Suri, President and CEO of InferX and a member of its Board of Directors, resigned as President and CEO and from the Board of the Company. Mr. B.K. Gogia, the founder of InferX, remained as Chairman of the Board and has assumed the positions of Acting President and CEO of InferX. Mr. Gogia intends to form a new management team for the Company. Further, Jerzy Bala, CTO tendered his resignation on June 15, 2012, and Rahul Argade, Senior Director also tendered his resignation.
As part of the July 23, 2012 filing of Form 8-K with the Securities and Exchange Commission, the Company notified shareholders that as a result of a dilutive issuance of shares on December 1, 2010 that was not disclosed to the two holders of debentures issued by the Company that it had sold 1,000,000 shares of common stock in December 2010 to an investor for $0.002 per share. This sale triggered rights under the debentures to convert debt into common stock at the same price. The Debentures were convertible into shares of common stock at a conversion price equal to $0.20 per share (the "Initial Conversion Price"). The Debentures also provided that, in the event InferX sold any common stock or other equity securities at an effective price per share that was lower than the Initial Conversion Price (a "Dilutive Issuance"), the Initial Conversion Price for the Debenture holders would be reduced to the lower price per share charged in connection with the Dilutive Issuance.
Without knowledge of the Dilutive Issuance, one of the debenture holders sent notices of conversion on January 19, 2011, May 19, 2011 and December 5, 2011. On each occasion, InferX honored the holder’s conversion request but utilized the Initial Conversion Price of $0.20 instead of the Base Conversion price of $0.002 per share. As a result of InferX's failure to apply the Base Conversion Price listed in the debenture, conversions on January 19, 2011, May 19, 2011 and December 5, 2011, InferX failed to issue 57,737,870 shares of common stock due to the debenture holder. On June 17, 2012, the other debenture holder notified InferX and Vijay Suri that he was converting $20,000 of principal and $21,397 in interest due into InferX common stock. Applying the Base Conversion Price that resulted from the Dilutive Issuance, the Company should have issued the second debenture holder 20,698,615 shares.
As a result of the Dilutive Issuance, the debenture holders were eligible to be issued 78,436,485 shares of common stock. Instead, the debenture holders elected to receive only 23,698,615 of the shares due the debenture holders and to release the Company from any financial damages incurred. The debenture holders have offered to place 57.48% or 44,737,870 of the shares due the debenture holders into escrow for the Company to use to secure the necessary financing, incentivize additional management talent and make acquisitions and forego being issued 10,000,000 shares. A percentage of the escrowed shares, to be mutually agreed to, will be cancelled upon the settlement of outstanding debt and past due salaries, certain intellectual property and patent enhancement of its current software products, and future financings.
Immediately prior to the issuance of the shares of InferX common stock under the Debentures, there are 20,669,453 shares issued and outstanding of which Vijay Suri owned 9,779,768 shares or 48.9% of the issued and outstanding shares of InferX. Following the conversion of the Debentures there will be 44,368,068 shares of InferX common stock issued and outstanding. The debenture holders will own 23,698,615 shares directly, excluding the 44,737,870 escrowed shares discussed above.
As a result of the resignation of Mr. Vijay Suri, President and CEO of InferX and a member of its Board of Directors; Mr. B.K. Gogia, by default became the sole member of the Board of Directors of InferX Corporation. The Board has taken the following actions.
The Board of Directors, on October 10, 2012 resolved to issue a warrant to a consultant to purchase up to 2,000,000 shares of the Company’s common stock at an exercise price of $0.04 per share for five years; all such shall vest immediately. In light of dilutive issue and to avoid any legal issue since the Certificate was not filed in June 2011 at the time of first investment received under the Series B Preferred Shares term sheet, the Board also resolved to reduce the conversion price to common shares from $0.40 to $0.07 per share and reprice the warrants from $0.75 to $0.20 to the eight purchasers of the 1,156,250 Series B Preferred Shares units.
INFERX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 16- SUBSEQUENT EVENTS (CONTINUED)
The Board of Directors also resolved on October 10, 2012 to authorize the voluntary release and conversion of past due salary of four employees in the amount of $1,240,303 into 20,730,390 shares of the Company’s common stock at a conversion price of $0.10. Further the Board of Directors issued to a consultant 1,000,000 shares of common stock at a conversion price of $0.04, for advice and counsel with two separate complex investment financing initiatives the Company was undertaking.
On October 15, 2012, the Company was notified of a Summons to appear in the Superior Court of Washington, DC, on October 13, 2012, in a matter which Fairchild Consultants, LLC, d/b/a Global Services a marketing support consulting services firm is seeking unpaid general consulting services fees in the amount of $9,900. Although the Company disputes the amount outstanding, the Company is in negotiations with Fairchild Consultants, LLC for resolution and settlement.
On October 25, 2012, the Board of Directors, recognizing that an error had been made concerning the filing of the Company’s application for Certificate of Designation pursuant to Section 151 of the General Corporation Law of the State of Delaware, made immediate notification and filing of appropriate documents with Secretary of State, State of Delaware for the designation of the series of Preferred Stock: “Series B Redeemable Convertible Preferred Stock”. The number of authorized shares of Series B Convertible Preferred Stock shall be 1,500,000. Interest at the rate of 10% per annum shall be payable annually in cash or in kind based upon the 30 day bid price moving average, at the Company’s discretion.
The Board of Directors, on November 13, 2012, resolved to reach an agreement with Fourth Street Fund forbear from sending a default notice to the Company and extending the maturity date of the Debenture to July 24, 2013. Further it was agree to correct the amount due under the Debenture, conversion of certain interest due under the Debenture, to issue additional shares of the Company’s common stock under the Class A, B, and C warrant conversions as a result of a dilutive issuance by the Company in December 2009 that reduced the share price to $0.002 per share. Additionally, The Company agreed to allow Fourth Street Capital to gift certain principal amounts of the debenture to a number of persons, and to limit the amount of further reductions for $50,000 of unpaid principal under the Debenture to $0.20 per share in the event that the Company meets a new investment financing deadline of December 31, 2012.
In an effort to obtain required equity or debt financing for technology development, market penetration and revenue growth, the Board of Directors have sought additional financing, therefore on October 2, 2012, the Board of Directors approved Stock Purchase Agreement, in which the Company has authorized the sale of an aggregate 16,666,667 shares of the Company’s common stock for an aggregate maximum purchase price of $500,000, based upon a per share price of $0.03, or a pre-money valuation of approximately $3,000,000. Further, the Company established an aggregate minimum purchase of $200,000, representing 6,666,666 shares of the Company’s common stock. The shares sold would be issued to the Investor as a unit of Common Stock and a warrant exercisable for five years to purchase 50% of the number of shares of common stock purchased by each investor, at an exercise price of $0.05 per share.
Within the framework of the Stock Purchase Agreement the Company received on December 4, 2012 from one investor $6,000, representing the sale of 200,000 shares of the Company’s common stock and issued a warrant exercisable for five years to purchase 100,000 shares of common stock at an exercise price of $0.05 per share.
To meet critical short-term financial requirements the Company entered into a 5% Convertible Promissory Note, with an investor in the amount of $6,500. Under the terms of the Note, the entire principal amount, together with all accrued interest is due on January 2, 2013.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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.