Item 1.
Business
We develop and market enterprise software that performs privacy preserving predictive analysis on computer databases. Predictive analytics is the analysis of historical and current information to identify trends and patterns to predict likely future outcomes. Our 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. Our technology can be used to identify and predict risks and opportunities in near real time for many applications, including homeland security, fraud and intrusion detection, and customer relationship management, or CRM. For example, our technology could help identify high risk cargo containers, identify fraudulent insurance claims or identify opportunities for cross selling and customer retention.
Historically, we have derived nearly all of our sales revenues under federal government contracts. Under these contracts, we performed research and development that enabled us to retain ownership of the intellectual property, which led to the creation of our current products. Due to the relatively small and uncertain margins associated with fixed price government contracts and the inherent limit of the market size, in fiscal 2002 we began to develop our software as a commercial product, concentrating on building specific applications that we believed would meet the needs of potential new customers. In fiscal 2003, we sold two commercial software licenses. However, since fiscal 2004, all of our revenues have derived from government contracts. Currently, we have one contract with the Department of Veterans Affairs.
Corporate History
Our company was incorporated in Delaware in May 2005 under the name Black Nickel Acquisition Corp. 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.
Market Opportunity
We believe that the demand for predictive analytics technology, in general, has increased in the last several years. Moreover, the need for advanced predictive analytics to analyze data in multiple remote locations has significantly increased due to the heightened security concerns after the events of September 11, 2001 and the proliferation of databases across the intelligence community and federal agencies. Our key executives have been working with the federal government for several years and have gained insight into the need for advanced predictive analytics software and the required capabilities of that software, particularly within the Department of Homeland Security (“DHS”). Prior to joining InferX, one of our key executives was tasked by the Office of the Inspector General to assess all of the analytics systems within DHS. His findings, some of which have been publicly released, show that there is a significant need for advanced predictive analytics technology that is privacy preserving and that analyzes data in multiple remote locations and predicts risks and opportunities in near real time. For example, DHS needs the ability to identify prospective terrorist threats by analyzing sensitive information contained in disparate databases maintained by different organizations, such as consumer and demographic information maintained by companies like Acxiom Corporation, consumer credit information maintained by companies like Experian and financial transaction information maintained by the United States Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”), all without jeopardizing the secrecy of the underlying information.
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In addition, our management has evaluated a number of activities where national and homeland security related concerns will require predictive analysis software. We believe that cargo security, particularly involving shipments through ports, as part of the international supply chain presents a need for predictive analytics software, with both government and private industry as potential purchasers of such software. Accordingly, we have developed a cargo security solution based on our technology that can simultaneously analyze data from manufacturers, distributors, shippers, port operators, customs authorities and others in the supply chain to identify shipments that pose a higher security risk and merit greater scrutiny or additional screening. We have completed and are currently marketing our cargo security solution.
As a result of the United States’ efforts, particularly through Customs and Border Protection under DHS, to secure the international supply chain and the need for the international community to adopt cargo security standards to ship cargo through U.S. ports, we believe that there will be a significant international market for our solution.
We believe our products have a broad application in many other verticals in the areas of fraud detection, risk analysis and customer retention. Specific examples of potential uses of our products are as follows:
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Financial Services: Increase customer retention; optimization of cross selling; detection of money laundering; and fraud detection.
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Insurance: Increase customer profitability; fraud detection; optimization of cross selling; and customer compliance.
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Healthcare: Optimal treatment analysis; clinical drug trial analysis; analysis of medical images; and healthcare fraud and abuse detection.
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Retail: Promotion effectiveness analysis; product placement analysis; optimization of cross selling; and sales force optimization.
Our Product Offerings
InferAgent®
Our flagship product is InferAgent. InferAgent was originally developed to analyze distributed sensor data from different locations for the Missile Defense Agency, an agency within the DoD. Lockheed Martin has successfully used InferAgent to analyze sensor data for a classified military project for target discrimination and acquisition.
InferAgent can analyze data in multiple geographic locations, in near real time without ever moving the data. InferAgent uses the Internet and private Intranets to analyze information from multiple locations. We use encrypted pointers to the data, which cannot be used to expose the data they represent, to move information across the network, thereby preserving the security and privacy of the databases.
As a result of the analysis, InferAgent can detect and predict risks and opportunities for both commercial and government customers. InferAgent is a generic solution that analyzes data in any structured data format. Based upon the trends and interrelations among the data, it can identify any kind of risk or opportunity that is relevant to the application.
For example, in national and homeland security applications, InferAgent could identify terrorism risks in the international supply chain - this is our cargo security application. InferAgent can analyze order data maintained by importers, customer order history and other data maintained by manufacturers, shipping manifests maintained by shipping companies, customer information maintained by freight forwarders. By analyzing these disparate databases using our technology, InferAgent can detect anomalies and other predictors of increased risk that would help port operators identify incoming shipments that should be subjected to increased scrutiny.
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In the financial services sector, InferAgent could identify opportunities for cross selling or transactions that are likely tied to money laundering, fraud or other illegal activity. InferAgent can analyze large databases of consumer credit history and demographic information maintained by companies like Acxiom and Experian together with a company’s internal customer history database to help the company identify products or services it does not currently offer but that its customers would likely be interested in buying. Analyzing consumer credit history and demographic information together with financial transaction information maintained by FinCEN could detect suspicious transactions or individuals who are engaging in suspicious financial transactions.
We believe that InferAgent has placed us at the forefront of a new category of technology called “privacy preserving analytics.” Members of our management have attended two academic conferences focused on privacy preserving analytics and conducted research of competing solutions on the market in development. To our knowledge, none of our competitors has a product that can simultaneously analyze data in multiple locations while maintaining the security and privacy of the underlying information. With InferAgent, privacy is preserved because the data is not moved.
InferTextTM
Based on InferAgent’s distributed architecture, InferText is designed to analyze unstructured content, such as documents, email and other types of text. Unlike traditional, keyword search based approaches to unstructured content, InferText transforms unstructured content into a format that facilitates the discovery of meaningful relationships among documents. We launched the commercial release of InferText in December 2007.
InferClusterTM
Clustering refers to the partitioning of data into groups such that data within the same group are more similar to each other than data in different groups. Clustering makes it easier to recognize outliers and other anomalies in the data. We believe that this has become an increasingly essential data analysis task. InferCluster automatically identifies similarities and performs this clustering without the need for user intervention. For example, in the financial services industry, clustering could group wire transfers according to various characteristics - amount, country of origin, date - and by revealing anomalous transactions, lead to the identification of money laundering activity.
InferCluster is designed to automatically perform clustering on distributed data, which we believe no other clustering solution currently does. InferCluster uses the same distributed architecture as InferAgent. We launched the commercial release of InferCluster in December 2007.
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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
InferView
Full application
US Serial:
10/617,054
Filed July 2003
Published
InferAgent
US Patent No.:
7,308,436
Filed July 2003, Issued December 2007
Expires April 2024
Issued
A hybrid Bayesian decision tree for classification
Full application
US Serial:
11/090,364
Filed March 2005
Published
InferCluster
Full application
US Serial:
11/904,982
Filed September 2007
Pending
InferText
Full application
US Serial:
11/904,674
Filed September 2007
Pending
Supply Chain Risk Assessment Application
Full application
US Serial:
12/069,948
Filed February 2008
Pending
Our InferView patent protects the product’s unique graphical user interface that helps visualize decision making models.
The InferAgent patent covers the architecture, algorithms and framework underlying InferAgent’s distributed data mining processes.
The hybrid Bayesian decision tree for classification patent describes our method for increasing the speed of decision making.
Our InferCluster Patent protects our unique method of automatically identifying similarities and performing clustering without the need for user intervention.
The InferText patent covers the method for transforming unstructured content into a format that facilitates the discovery of meaningful relationships among documents and other data.
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The Supply Chain Risk Assessment Application patent covers our methods of applying our technology to cargo risk assessment.
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:
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predictive modeling companies;
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CRM solutions providers;
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business intelligence solutions providers; and
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software companies supplying modeling, rules or analytic development tools.
Companies such as SAS Institute Inc., SPSS Inc., Fair Isaac Corporation, Angoss Software Corp., Megaputer Intelligence, Inc. and Insightful Corporation 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 (a division of NCR Corporation) provide analytical tools that only operate with their respective proprietary database products. InferAgent can operate with multiple databases, regardless of the underlying database format.
Companies such as Infoglide Software Corporation, International Business Machines Corporation, Knowledge Computing Corporation, Exegy, Inc. and Dulles Research, LLC, market software that can perform discovery over networks and distributed data sources. However, 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:
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access and mine remote data
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provide predictive analysis where many future risks and opportunities can be identified
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work with multiple databases in different formats
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integration of both structured and unstructured analysis
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preserve the privacy of data
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maintain the security and ownership of data
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eliminate the need for creating data warehouses
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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. Also, we believe that the elimination of the 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.
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Sales and Marketing
We have used outside consultants to assist us in developing our marketing and collateral material, branding and Web design and content creation. We also use outside consultants to help develop market and media awareness campaigns along with public relations strategies. We are not substantially dependent on our relationship with these outside consultants to accomplish our marketing plans.
We have hired Jesus Mena as our Chief Strategy Officer to assist with our overall product and market strategy, particularly on efforts within DHS. Mr. Mena has over 25 years of experience in data mining and has written four books on data mining and homeland security, including his latest, “Homeland Security Techniques and Technologies.” Mr. Mena recently completed a DHS-wide audit of all DHS analytical and data mining systems and has detailed knowledge and insight into the efforts and needs of the DHS components. We believe there are considerable barriers to entry when pursuing sales within DHS. They include having access to the proper contracting vehicle, having facilities and people with the proper security clearances and having personnel with appropriate core knowledge in both product offerings and DHS sales procedures. However, we believe that the addition of Mr. Mena and our continuing work with the Missile Defense Agency enables us to overcome DHS barriers and affords us significant sales advantages.
In addition, we engaged Michael D. Brown in marketing our products and services to senior government officials and members of Congress. Mr. Brown was formerly the Department of Homeland Security Under Secretary of Federal Emergency Management and Director of the Federal Emergency Management Agency. From September 2005 through March 17, 2008, Mr. Brown worked with us in the development, marketing and presentation of our products to potential government and commercial customers, and on March 17, 2008, Mr. Brown became our President and CEO.
We have positioned InferX as a leading provider of Privacy Preserving Real-Time Analytics solutions. With the assistance of our public relations firm, we have positioned key members of InferX management as industry experts where we provide expert analysis to the technical and media communities.
Although we currently have no contractual relationship, we have also recently worked with Northrop Grumman and Lockheed Martin, both of which we believe have substantial credibility within DHS. Both companies use our software, and we believe our previous work with them will allow us to explore potential business opportunities with them on possible future DHS contracts at a minimal cost. We also have developed a network of business development and marketing professionals who work directly with large systems integrators, such as Raytheon, General Dynamics, SAIC and others.
Our sales strategy is to identify potential customers by targeting entities where there is a need for advanced analyses and data privacy is a significant concern. Our early focus is on the following:
1.
components of DHS that are analyzing intelligence, detecting terrorist activities and detecting criminal activities or patterns;
2.
other U.S. federal government departments where focus is on:
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detecting fraud, waste and abuse;
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detecting criminal activities; or
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improving service or performance;
3.
international supply chain participants, such as importers, sea carriers, sea ports and terminal operators;
4.
the financial community in need of advanced CRM solutions; and
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5.
commercial enterprises that we expect would be early adopters of advanced analytics technologies, such as financial services and insurance firms.
In 2007, we began building our sales team and have hired two full-time professionals who are both salary and commission based. We are also focusing on building relationships with channel partners that are leading systems integrators, application developers and platform partners, to generate sales to high-volume data content owners both domestically and abroad. The channel partners will be compensated by substantial product discounts that are consistent in the industry.
Through 2008, we plan to expand our sales and marketing force to seven employees.
Customers
Government contracts are currently our sole source of revenue. For the past two years, payments under contracts with the Missile Defense Agency have accounted for substantially all of our revenues from operations. We expect that government contracts will continue to be a significant source of our revenues for the foreseeable future.
Research and Development
We have developed a company wide 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 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 eight employees: six full-time employees, five of whom devote at least a portion of their time to sales and marketing, one part time executive employee, and one part-time administrative employee. Six of our employees are 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
Investing in our securities involves a high degree of risk. Before investing in our securities, you should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. 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
The likelihood of successfully implementing our business plan cannot be predicted from our limited operating history.
Although our predecessor entity commenced operations in January 1992, we entered our current business based on software product sales in April 2000 and achieved our first sale in 2003. Since then, our software product sales have totaled less than $1,000,000. Therefore, there is limited historical basis on which to determine whether we will be successful in implementing our business plan.
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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.
We operate in a competitive market which could constrain our future growth and profitability.
We operate in a competitive environment, competing for customers with software companies, consulting firms and others. Many of our competitors offer complimentary products and/or services that we do not offer. Moreover, some of our competitors are much larger than we are, have proven products and services and may have the marketing and sales capabilities to commercialize competing products and services more effectively than we can.
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 5,121,239 shares, or approximately 37.5%, 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.
The loss of our executive officers and certain other key personnel could hurt our business.
Our success wholly depends upon the personal efforts and abilities of our Chairman of the Board, officers and other key personnel, B.K. Gogia, Michael Brown, Scott Parliament, C. Vincent Tubbs, Jerzy Bala and Jesus Mena. 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 may not be able to hire and retain qualified technical personnel.
Competition for qualified personnel in the computer software industry is intense, and we may not be successful in attracting and retaining such personnel. Failure to attract qualified personnel could harm the proposed growth of our business. In addition, companies in our industry whose employees accept positions with competitors frequently claim that the competitors have engaged in unfair hiring practices. We may receive such notices in the future as we seek to hire qualified personnel and such notices may result in material litigation and related disruption to our operations.
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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 currently have three patent applications pending and we have filed two provisional patents recently. 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.
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 revenues.
Revenues derived from federal government contracts accounted for all of our revenues since fiscal 2004. 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:
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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;
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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;
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we are not granted security clearances that are required to sell our products or services or such security clearances are revoked; or
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our reputation or relationship with government agencies is impaired.
Most of our contracts with the government, including our current contract with the Department of Veterans Affairs contain standard provisions that provide for termination at the convenience of the government pursuant to which we are entitled to recover costs incurred, settlement expenses, and profit on work completed prior to termination.
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 effect 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 (1) to obtain accurate quotations, (2) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (3) 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.
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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 2008. 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, 2007 and 2006 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 April 10, 2008 and February 16, 2007 in connection with the audit of our financial statements for the years ended December 31, 2007 and 2006 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
Not applicable.
Item 2.
Item 2.
Description of Property
We lease approximately 4,700 square feet of office space at 1600 International Drive, Suite 110, McLean, Virginia pursuant to a lease which expires in November 2008. Our lease provides for an annual rental of approximately $101,000 which is subject to annual escalations of 4%. The space can house approximately 15 to staff. We believe that our facilities are adequate for our needs and that additional space is readily available should we need it.
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Item 3.
Item 3.
Legal Proceedings
We are not aware of any pending legal proceedings against us.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related 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 “IFRX”. 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 5, 2007 through December 31, 2007, as reported by PinkSheets LLC, were $0.52 and $0.25, respectively. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Holders
As of April 14, 2008, there were 36 record holders of 13,530,892 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
Not applicable.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Financial Statements and the notes thereto that appear in Item 8 of this annual report on Form 10-K.
Overview
Our company was formed in May 2005 to pursue a business combination. On October 24, 2006, we acquired InferX Corporation, a Virginia corporation (“InferX Virginia”), and on October 27, 2006 we merged InferX Virginia into our company and changed our name to “InferX Corporation.” After the acquisition of InferX Virginia, we succeeded to its business as our sole line of business. 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 (“Datamat”), pursuant to which Datamat was the surviving corporation and changed its name to “InferX Corporation.”
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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 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.
Historically, we have derived nearly all of our sales revenues under federal government contracts. Under these contracts, we performed research and development that enabled us to retain ownership of the intellectual property, which led to the creation of our current products. Due to the relatively small and uncertain margins associated with fixed price government contracts and the inherent limit of the market size, in fiscal 2002 we began to develop our software as a commercial product, concentrating on building specific applications that we believed would meet the needs of potential new customers. In fiscal 2003, we sold two commercial licenses. However, since fiscal 2004, all of our revenues have derived from government contracts. Currently, we have one contract with the Department of Veterans Affairs.
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 and our wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
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 three 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 $100,000.
Allowance for Doubtful Accounts
We provide 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, 2007, an allowance of $2,364 is required.
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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 2007 and 2006, we capitalized certain software development costs. We capitalize the cost of software in accordance with SFAS 86 once technological feasibility has been demonstrated, as we have in the past sold, leased or otherwise marketed our software, and plans on doing so in the future. We capitalize costs incurred to develop and market our privacy preserving software during the development process, including payroll costs for employees who are directly associated with the development process and services performed by consultants. Amortization of such costs is based on the greater of (1) the ratio of current gross revenues to the sum of current and anticipated gross revenues, or (2) the straight-line method over the remaining economic life of the software, typically five years. It is possible that those anticipated gross revenues, the remaining economic life of the products, or both, may be reduced as a result of future events. We have not developed any software for internal use. For the years ended December 31, 2007 and 2006, we recognized $177,003 and $177,003 of amortization expense on our capitalized software costs, respectively. Commencing January 1, 2008, we placed an additional $226,084 of software development into service, which will be amortized over a three year period.
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
We generate revenue from professional services rendered to customers as well as from application management support contracts with governmental units. Our revenue is generated under time-and-material contracts and fixed-price contracts.
Time-and-Material Contracts
Time-and-material contracts revenue is generated whereby costs are generally incurred in proportion with contracted billing schedules and revenue is recognized as services are performed, with the corresponding cost of providing those services reflected as direct costs. The customers are billed in accordance with the contracts entered into. Such method is expected to result in reasonably consistent profit margins over the contract term.
Fixed-Price Contracts
Revenue from firm-fixed-price contracts is recognized upon achievement of the milestones contained in the contracts in accordance with the provisions of Staff Accounting Bulletin 104. Revenue is not recognized until collectability is assured, which does not take place until completion of the particular milestone. Costs are recognized as services are performed.
We do 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.
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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
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) published Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R, as amended, are effective for small business issuers beginning as of the next interim period after December 15, 2005. We adopted these provisions as of January 1, 2006, and this adoption did not have a material effect on our operations.
On January 1, 2006, we adopted the provisions of FAS No. 123R “Share-Based Payment” (“FAS 123R”) which requires recognition of stock-based compensation expense for all share-based payments based on fair value. Prior to January 1, 2006, we measured compensation expense for all share-based compensation using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. In the notes to our consolidated financial statements, we have provided pro forma disclosure amounts in accordance with FAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123” (“FAS 148”), as if the fair value method defined by FAS No. 123, “Accounting for Stock Based Compensation” (“FAS 123”) had been applied to our stock-based compensation.
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 estimated in accordance with the original provisions of FAS 123. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values estimated in accordance with the provisions of FAS 123R. 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.
Our warrants issued in the private placement in October 2006, were not stock based compensation. Our options issued in October 2007 were considered stock based compensation (see Note 7 to our consolidated financial statements).
Concentrations
We have derived all of our revenue from two customers with 95% and 100% for the years ended December 31, 2007 and 2006, respectively, of the revenue from one of these customers.
Financial instruments that potentially subject us 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
We follow the provisions of SFAS 131, “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. We believe that there is only one operating segment.
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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 Financial Accounting Standards Board Statement No. 109, “Accounting for Income Taxes,” the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Uncertainty in Income Taxes
In July 2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. Management has adopted FIN 48 for 2007, and they evaluate their tax positions on an annual basis, and has determined that as of December 31, 2007, no additional accrual for income taxes is necessary.
(Loss) Per Share of Common Stock
Basic net (loss) per common share (“EPS”) is computed using the weighted average number of common shares outstanding for the period. Diluted earnings per share includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when we report a loss because to do so would be anti-dilutive for the periods presented.
The Class A and Class B warrants were issued in October 2006 in the private placement however were not included as they would be considered anti-dilutive as we had a loss for this period.
Research and Development
Research and development costs are expensed as incurred. In addition, research and development costs of $32,127 and $49,366 have been included in indirect labor and $183,548 and $104,782 have been included in direct labor and subcontractor costs for the years ended December 31, 2007 and 2006, respectively.
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Recent Issued Accounting Standards
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is encouraged. The adoption of SFAS 157 is not expected to have a material impact on our consolidated financial statements.
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115”, (“FAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
In December 2006, the FASB Staff issued FSP EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“EITF 00-19-2”). EITF 00-19-2 addresses an issuer’s accounting for registration payment arrangements. EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, Accounting for Contingencies. EITF 00-19-2 is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. Application of EITF 00-19-02 resulted in an adjustment in January 2007 reclassifying the derivative liability to additional paid-in capital and retained earnings. The adjustment reduced the derivative liability by $1,031,703 and increased additional paid-in capital by $547,086 and increased retained earnings by $484,617 which was the cumulative-effect adjustment resulting from the adoption of this standard.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No 51” (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment.
SFAS is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Management is determining the impact that the adoption of SFAS No. 160 will have on our consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”), which replaces FASB SFAS 141, Business Combinations. This Statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R will require an entity to record separately from the business combination the direct costs, where previously these costs were included in the total allocated cost of the acquisition. SFAS 141R will require an entity to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquired at the acquisition date, at their fair values as of that date. This compares to the cost allocation method previously required by SFAS No. 141.
SFAS 141R will require an entity to recognize as an asset or liability at fair value for certain contingencies, either contractual or non-contractual, if certain criteria are met. Finally, SFAS 141R will require an entity to recognize contingent consideration at the date of acquisition, based on the fair value at that date. This Statement will be effective for business combinations completed on or after the first annual reporting period beginning on or after December 15, 2008. Early adoption of this standard is not permitted and the standards are to be applied prospectively only. Upon adoption of this standard, there would be no impact to our results of operations and financial condition for acquisitions previously completed. The adoption of SFAS No. 141R is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.
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In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expresses the current view of the staff that it will accept a company's election to use the simplified method discussed in Staff Accouting Bulletin No. 107, “Share Based Payment", (“SAB107”), for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. SAB 110 became effective for us on January 1, 2008. The adoption of SAB 110 is not expected to have a material impact on our final position.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the consolidated financial statements upon adoption.
Results of Operations and Financial Condition
Fiscal Years Ended December 31, 2007 and 2006
Revenue for the year ended December 31, 2007 was approximately $371,000, an increase of approximately $171,000, or 86% from approximately $200,000 for the same period in 2006. This was a result of increased federal contracts related to the Company’s core competencies.
Direct costs for the year ended December 31, 2007 were approximately $373,000 compared to approximately $282,000 for the same period in 2006, an increase of approximately $91,000 or 32%. Direct costs before capitalization of labor costs were approximately $452,000 in 2007 and $317,000 in 2006, representing capitalized labor of approximately $98,000 and $35,000 in 2007 and 2006, respectively. The increase in direct costs in 2007 resulted primarily from increases related to additional contract requirements. Specifically, an increase in subcontract labor of approximately $54,000, increases in other costs of approximately $12,000 and a gross increase in direct labor of $24,000 over 2006. Because of our increased revenues our gross margin increased in the year ended December 31, 2007 to (0%) from (41%) for the same period in 2006.
Operating expenses, which include indirect labor, professional fees, advertising, consulting and general and administrative, increased approximately $601,000 from approximately $1,090,000 for the year ended December 31, 2006 to approximately $1,691,000 for the same period in 2007. This represents an increase of 55%. The increase is the result of the following: an increase in indirect and overhead labor and fringes of approximately $256,000 resulting from costs related to an increase in staffing in 2007; an increase in professional services of approximately $114,000, consisting primarily of increased legal and filing costs related to public filings; an increase in share based compensation of approximately $28,000 as a result of options issued under the Company’s option plan; an increase in travel of approximately $21,000 due to increased sales and development activity; and increase in General and Administrative costs of approximately $31,000; an increase in Registration Penalty expenses of approximately $134,000 due to a penalty required in 2007 due to the timing of the effectiveness of the Company’s registration statement and an increase in depreciation and impairment of approximately $14,000 due primarily to the 2007 impairment charge on the Company’s InferView product.
Fiscal Years Ended December 31, 2006 and 2005
Revenue for the year ended December 31, 2006 was approximately $200,000, a decrease of approximately $25,000, or 11% from approximately $225,000 for the same period in 2005. This was a result of a decision by management to reduce reliance on general Federal Government professional services contracts and to concentrate on Federal Government contracts within our core competency and further development and sales of our software for use in the commercial sector.
Direct costs for the year ended December 31, 2006 were approximately $282,000 compared to approximately $209,000 for the same period in 2005, an increase of approximately $73,000 or 35%. Direct costs before capitalization of labor costs were approximately $317,000 in 2006 and $233,000 in 2005, representing capitalized labor of approximately $35,000 and $24,000 in 2006 and 2005, respectively. This increase in direct costs in 2006 compared to 2005 of approximately $84,000 or 36% resulted primarily from an increase in subcontract labor of approximately $50,000 in 2006 and reductions in salary accepted by key direct employees in 2005 of approximately $35,000 when compared to 2006. Accordingly, our gross margin declined in the year ended December 31, 2006 to (41%) from 7% for the same period in 2005.
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Operating expenses, which include indirect labor, professional fees, advertising, consulting and general and administrative, increased approximately $563,000 from approximately $527,000 for the year ended December 31, 2005 to approximately $1,090,000 for the same period in 2006. This represents an increase of 107%. The increase is the result of the following: an increase in indirect and overhead labor and fringes of approximately $352,000, resulting from costs related to an increase in staffing in 2006 of approximately $125,000 and reductions in salaries and fringes accepted by key employees in 2005 of approximately $240,000; an increase in professional services of approximately $263,000, consisting of non-cash charges of approximately $199,000 for stock issued to consultants for services and an increase in accounting costs of approximately $64,000 related to our becoming a public company; and a reduction in advertising and marketing of approximately $69,000, which reflects reduced reliance on outside consults for branding and advertising.
Liquidity and Capital Resources
We had cash of approximately $2,000 at December 31, 2007 and a working capital deficit of approximately ($796,000). During the year ended December 31, 2007, we used approximately $502,000 from our operations. Operations were funded primarily from the exercise of warrants of approximately $629,000.
In October 2006, we completed a private placement in which the investors paid $.50 per share of common stock, and also received one five-year warrant with an exercise price of $.50 and one five-year warrant with an exercise price of $.62. We sold 2,329,392 units in the private placement (including $362,196 in cancellation of indebtedness and accrued interest under outstanding bridge loans), resulting in gross cash proceeds of approximately $802,500. In April 2007, we and holders of our Class A warrants agreed to reduce the exercise price of 80% of the Class A warrants to $.25 per share for a period of two weeks. We received approximately $407,000 from the exercise of 1,629,513 warrants. In November 2007, the holders of our Class A warrants exercised an additional 444,879 warrants resulting in gross cash proceeds of approximately $222,000.
We have entered in to employment contracts that range in length from three to five years with five employees. The contracts call for total annual compensation in the amount of $848,000.
We will need to generate significant additional revenue to support our projected increases in staffing and other operating expenses, which we cannot give any assurance we will be able to accomplish. We are currently expending approximately $125,000 per month to support our operations, and under our projected growth plan, we would be expending approximately $250,000 per month by the end of fiscal 2008. Along with revenues from our existing contracts, we believe our existing capital is sufficient to fund our operations only through the second quarter of 2008. If we are unable to generate increased revenue, it will be necessary for us to significantly reduce expenses or raise additional capital to stay in business. We estimate that we will require approximately $1,000,000 in additional capital to sustain our operations at their current level through fiscal 2008 and that we will require as much as $3,000,000 in additional revenues or $1,500,000 in additional funding to achieve our projected growth plan.
Although we believe the additional capital we will require will be provided either through the exercise of warrants, debt and/or increased revenue, we cannot assure you that the warrants will be exercised, we can obtain debt at acceptable terms or that we can generate sufficient revenue to maintain projected operating levels. Accordingly, we may need to try to secure additional equity or debt financing which we cannot assure you would be available to us at prices that would be acceptable. Our failure to generate such revenue, reduce expenses or obtain necessary financing could impair our ability to stay in business 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.
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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, 2007. 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, 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, 2007 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, 2007 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, 2007. 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.
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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, 2007, 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
None.
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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
Director Since
B.K. Gogia
Chairman of the Board of Directors
Michael D. Brown
President and Chief Executive Officer
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Dr. Jerzy W. Bala
Chief Technical Officer and
a Director
Scott B. Parliament
Chief Financial Officer and
a Director
Jesus Mena
Chief Strategy Officer
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Management Biographies
B.K. Gogia - Mr. Gogia has been a director of InferX since our acquisition of InferX Virginia in October 2006 and was our President and Chief Executive Officer from October 2006 through March 17, 2008. Mr. Gogia was the founder of and had been President, CEO and Director of InferX Virginia since its inception in 1992. Prior to the formation of InferX Virginia, Mr. Gogia was Technical Director/Software Manager with Science Applications International Corporation (SAIC), and held senior technical positions with L3 Corporation and Lockheed Martin Corporation. Mr. Gogia began his career as a systems engineer and software developer with Data General Corporation in the field of compilers and operating systems.
Mr. Gogia holds a Bachelors degree from the University of Delhi, India; a Masters 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 chosen to participate in a Mindshare program for CEOs of the most promising technology companies in the Greater Washington area.
Michael D. Brown - Mr. Brown has been our President and Chief Executive Officer since March 17, 2008. Commencing in 2001 Mr. Brown served as General Counsel of the Federal Emergency Management Agency (“FEMA”), and from April 2003 to September 2005 served as Undersecretary of Emergency Preparedness and Response, a division of the Department of Homeland Security, also referred to as Director of FEMA. Since September 2005, Mr. Brown has served as a consultant and assisted InferX in the development, marketing and presentation of its products to potential government and commercial customers.
Jerzy W. Bala, Ph.D. - Dr. Jerzy Bala has been Chief Technical Officer and a director of InferX since our acquisition of InferX Virginia in October 2006. Dr. Bala had been employed by InferX Virginia since 1994 as Chief Scientist and was appointed Chief Technical Officer of InferX Virginia in May 2006 and a director in September 2006. Dr. Bala defines short and long term technology directions for the products, business cases for new markets, oversees research and development of future products and existing products, and manages intellectual property for InferX.
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From May 2002 to October 2002, Dr. Bala 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.
From September 1998 to May 2000, Dr. Bala 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 70 peer reviewed publications in conference proceedings and journals and other numerous technical papers to its credit.
Scott B. Parliament - Mr. Parliament has been Chief Financial Officer and a director of InferX since our acquisition of InferX Virginia in October 2006. Mr. Parliament had been Chief Financial Officer of InferX Virginia since April 2005 and a director since September 2006. From April 2003 to December 2004, he was Chief Financial Officer of Securit-e-doc, Inc., a security and communications software company. From 2000 to April 2003, he was a Principal of KAM Strategic Advisors, a financial and management consulting firm. Mr. Parliament was also Chief Financial Officer for BioShield Technologies, Inc. (NASDAQ: BSTI) in 2000. Mr. Parliament’s experience in business development and marketing includes serving as head of marketing at Securit-e-doc, Inc. and Head of Retail Partnerships (business development) for Consumer Financial Network, a wholly owned subsidiary of IXL (NASDAQ: IIXL), from 1999 to 2000, and Chief Operating Officer, Director and Chief Financial Executive for Innovo Group, Inc. (NASDAQ: INNO) from 1996 to 1998. He is a CPA and spent ten years from 1980 to 1989 with BDO Seidman, one of the major international accounting firms where he specialized in business development and marketing focused on small market business expansion. Mr. Parliament has a BS in Accountancy from Ferris State University.
Jesus Mena - Mr. Mena has been the Chief Strategy Officer of InferX since our acquisition of InferX Virginia in October 2006 and had been the Chief Strategy Office of InferX Virginia since August 2006. From November 2005 to August 2006 he was a data mining consultant to the Department of Homeland Security, Office of Inspector General, where he was the technical lead consultant on the first department wide audit of all data mining and advanced analytical systems. He held the same positions with the Sandia National Laboratories from April 2003 to November 2004, the National Counterterrorist Center from May to July 2004, and the General Accountability Office in April to June 2004. Mr. Mena is a world renowned expert in analytics and data mining, and has published several books, including Homeland Security Techniques and Technologies (2005), Investigative Data Mining for Security and Criminal Detection (2003), Web Mining for Profit (2002), and Data Mining Your Website (2001). From April 2000 to February 2002, Mr. Mena was the CEO of WebMiner, Inc., a company in the business of Internet marketing. Prior to this Mr. Mena spent approximately twenty years with the Internal Revenue Service where he was the lead data miner and artificial intelligence specialist. Mr. Mena has a BA in Communications from the University of Texas, El Paso.
Other Significant Employees
C. Vincent Tubbs - Mr. Tubbs has been our Vice President of Sales since October 2007. Previously, Mr. Tubbs served from September 2006 to September 2007 as General Manager of Federal Sales and Operations for Narus Inc., a privately-held company that provides real-time traffic intelligence for the protection and management of large IP networks. Prior to Narus Inc., from September 2003 to August 2006, Mr. Tubbs served as Senior Manager Government Business Development for Lucent Technologies/Bell Labs, which subsequently combined operations with Alcatel. From September 2002 to September 2003, Mr. Tubbs was Assistant Director Government Solutions for Wiltel Communications Group LLC, a privately-held provider of voice, data, video and IP services that was subsequently sold to Level 3 Communications, Inc.
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There are no family relationships among the officers and directors.
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
We have not adopted a Code of Ethics, but we intend to do so in 2008.
Audit, Nominating and Compensation Committees
Our Board of Directors does not have standing audit, nominating or compensation committees, and our Board of Directors performs the 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 B.K. Gogia, as President and Chief Executive Officer during the fiscal year ended December 31, 2007, and each other executive officer whose compensation exceeded $100,000 in the fiscal year ended December 31, 2007 are set forth in the Summary Compensation Table below.
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SUMMARY COMPENSATION TABLE
(1)
Consists of an automobile allowance in the amounts of $9,942, $9,073 and $8,998, and life insurance premiums for which we are not the beneficiary in the amounts of $15,707, $14,027 and $14,256, for the years ended December 31, 2007, 2006 and 2005, respectively.
In May 2006, we entered into employment agreements with four executive officers: B.K. Gogia, Dr. Jerzy W. Bala, Scott B. Parliament and Jesus Mena. The employment agreements with Dr. Bala, Mr. Parliament and Mr. Mena each have a term of three years, and Mr. Gogia’s agreement has a term of five years. Each of these employment agreements are terminable by the company during the term with or without cause. The employment agreements are terminable by the executives for “good reason”, including a material breach of the employment agreement not cured within 15 days. Upon termination for “good reason” by the executive or by the company without cause, Mr. Parliament and Mr. Mena would receive a six month severance payment, Dr. Bala’s severance payment would be for nine months and Mr. Gogia’s severance payment would be the greater of two years or the remaining term of his employment agreement. Under their employment agreements each of the employees is eligible for a bonus upon achieving objectives determined by management for each executive for achieving certain performance targets. For the fiscal year ended December 31, 2007 and 2006, each executive agreed that no performance targets would be set and no bonuses would be paid.
On March 17, 2008, we entered into an Executive Employment Agreement with Michael D. Brown. Under the terms of his executive employment agreement, Mr. Brown will receive a base salary of $48,000 that will increase to $120,000 per annum, payable semi-monthly, in the month following a quarterly reporting period in which the Company reports EBITDA of $250,000 or more. Mr. Brown is eligible for a bonus at the discretion of the Board of Directors. Under his executive employment agreement, Mr. Brown will receive an option to acquire 150,000 shares of InferX’s common stock as follows: 50,000 options upon InferX executing contracts that will generate $500,000 in gross revenues over the term of the contracts; 50,000 options upon InferX executing contracts that will generate $1,000,000 in gross revenues over the term of the contracts; and 50,000 upon InferX executing contracts that will generate $1,500,000 in gross revenues over the term of the contracts. All options will be subject to accelerated vesting if Mr. Brown’s employment is terminated by him for Good Reason, as that term is defined in his agreement. Mr. Brown had a consulting agreement with InferX dated December 5, 2006 under which he assisted InferX in the development, marketing and presentation of its products to potential government and commercial customers. The consulting agreement had a term of 12 months, and we agreed to pay Mr. Brown $8,000 per month during the term of the consulting agreement plus an 8% commission on any product sales and a 3% commission on consulting services that he generated. Mr. Brown also was granted an option to purchase up to 75,000 shares of our common stock at a price of $.50 per share, vesting in four equal installments on February 28, May 31, August 31 and November 30, 2007, subject to certain conditions.
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We have a 401(k) plan for which we provide no matching funds. In October 2007, we adopted a qualified stock option plan that will include up to 2,200,000 shares of our common stock. No other retirement, pension, or profit sharing exist.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
(1)
Includes 5,000 shares underlying options granted to Mr. Gogia’s spouse.
(2)
Vests as to 16,667 on August 1, 2008 and as to the remaining 16,666 on August 1, 2009.
The table entitled “DIRECTOR COMPENSATION” and the discussion related to that tables have 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.
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Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of April 14, 2008, 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 13,530,892 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, 1600 International Drive, Suite 110, McLean, Virginia 22102 unless otherwise indicated.
* Less than 1%
(1)
Includes 177,330 shares owned directly by Mr. Gogia’s daughter, 177,330 shares owned directly by Mr. Gogia’s son, and 35,466 shares owned directly by Mr. Gogia’s spouse. Also includes 5,000 shares underlying currently exercisable options owned directly by Mr. Gogia and 5,000 shares underlying currently exercisable options owned directly by Mr. Gogia’s spouse. Mr. Gogia disclaims beneficial ownership of all shares owned directly by others.
(2)
Represents shares underlying currently exercisable options owned directly by Mr. Brown.
(3)
Includes 5,000 shares underlying currently exercisable options owned directly by Dr. Bala.
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(4)
Includes 10,000 shares owned directly by one of Mr. Parliament’s sons, and 10,000 shares owned directly by another of Mr. Parliament’s sons. Also includes 5,000 shares underlying currently exercisable options owned directly by Mr. Parliament. Mr. Parliament disclaims beneficial ownership of all shares owned directly by others.
(5)
Represents shares underlying currently exercisable options owned directly by Mr. Mena.
(6)
Based upon information provided to or otherwise known by the company and contained in the amended Schedule 13G filed by Mr. Prag on November 3, 2006. By their terms, the warrants held by Mr. Prag are not exercisable to the extent that exercise would result in Mr. Prag’s beneficial ownership of greater than 4.99% of the company’s issued and outstanding common stock. If all of his warrants were exercisable in full, Mr. Prag would beneficially own 875,118 shares of common stock, which would represent beneficial ownership of approximately 6.37% of the company’s issued and outstanding common stock.
(7)
Based upon information provided to or otherwise known by the company and contained in the Schedule 13G filed by Sandor Capital Advisors, LLC, a Texas limited liability company (“Sandor Advisors”), and Mr. Lemak, the principal of Sandor Advisors, on November 1, 2006. Includes 357,173 shares directly owned by Mr. Lemak. Also includes 182,033 of the 1,020,908 shares issuable upon the exercise of warrants owned by Sandor Advisors and held by Sandor Capital Master Fund, L.P. (“Sandor Capital”) (713,940 shares) and Mr. Lemak (306,968 shares), in the aggregate, that are exercisable within 60 days. By their terms, the warrants held by Sandor Capital and Mr. Lemak are not exercisable to the extent that exercise by either of them would result in the joint beneficial ownership by Sandor Advisors and Mr. Lemak of greater than 9.99% of the company’s issued and outstanding common stock. If all of the warrants were exercisable in full, Sandor Advisors and Mr. Lemak would jointly beneficially own 2,196,455 shares of common stock, which would represent beneficial ownership of approximately 15.09% of the company’s issued and outstanding common stock. Mr. Lemak makes investment decisions on behalf of Sandor Advisors.
(8)
Based upon information provided to or otherwise known by the company and contained in the Schedule 13G filed by Lacuna Venture Fund LLLP (“Lacuna Venture Fund”), Lacuna Ventures GP LLLP (“Lacuna GP”) and Lacuna, LLC (“Lacuna LLC,” and, together with Lacuna Venture Fund and Lacuna GP, the “Lacuna Entities”) on November 3, 2006. Also includes 1,024,021 of the 1,800,000 shares issuable upon the exercise of warrants owned by the Lacuna Entities that are exercisable within 60 days. By their terms, the warrants held by Lacuna Venture Fund are not exercisable to the extent that exercise would result in the Lacuna Entities’ beneficial ownership of greater than 19.99% of the company’s issued and outstanding common stock. If all of the warrants were exercisable in full, the Lacuna Entities would beneficially own 3,672,407 shares of common stock, which would represent beneficial ownership of approximately 23.95% of the company’s issued and outstanding common stock. Rawleigh Ralls makes investment decisions on behalf of each of the Lacuna Entities.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Bridge Loan
In May 2006, certain investors provided a bridge loan to InferX Virginia in the aggregate principal amount of $350,000 (the “Bridge Loan”). Robert B. Prag, John Lemak and Sandor Capital Master Fund, L.P. (“Sandor Capital”), who beneficially owns greater than 5% of our issued and outstanding shares of common stock, provided $50,000, $50,000 and $100,000, respectively, of the Bridge Loan. In consideration for the Bridge Loan, the investors received shares of InferX Virginia common stock convertible into an aggregate of 250,000 shares of common stock upon the consummation of our acquisition of InferX Virginia. Mr. Prag was issued 35,714 of these shares, Mr. Lemak was issued 35,714 of these shares and Sandor Capital was issued 71,429 of these shares. Upon the consummation of the acquisition, the entire principal amount of the Bridge Loan, plus interest accrued at the rate of 8% per annum, was repaid by the company, including the payment of $50,000 plus interest to Mr. Prag, $50,000 plus interest to Mr. Lemak and $100,000 plus interest to Sandor Capital. In lieu of payment in cash upon the consummation of the acquisition, Mr. Prag purchased 103,484 units, Mr. Lemak purchased 103,484 units and Sandor purchased 206,970 units in the October 2006 private placement in consideration of his cancellation of the entire principal amount of his Bridge Loan plus accrued interest, totaling $51,742, $51,742 and $103,485, respectively.
Registration Rights
In connection with our acquisition of InferX Virginia, the October 2006 private placement, and certain other agreements, we have agreed to file registration statements under the Securities Act to register the resale of our common stock beneficially owned by our former directors, officers and stockholders, Paul T. Mannion Jr., Andrew Reckles and Robert B. Prag, as well as the individuals who became directors, officers and significant stockholders following the acquisition: B.K. Gogia, Jerzy W. Bala and Scott B. Parliament. In addition, if we fail to meet certain deadlines in filing or having the registration statements declared effective, some of these individuals will be entitled to receive additional shares of common stock as a penalty. As a penalty 268,404, shares of stock were issued in 2007 to satisfy the obligation.
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Transactions between Black Nickel and the Founding Stockholders
Immediately prior to the consummation of our acquisition of InferX Virginia, we acquired an aggregate of 300,000 shares of our common stock from Messrs. Mannion, Reckles and Prag for an aggregate purchase price of $300.00.
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
The aggregate fees billed for each of the fiscal years ended December 31, 2007 and 2006 for professional services rendered by the principal accountant for the audit of our annual financial statements and reviews of the quarterly financial statements was $38,000 and $30,000, respectively.
Audit Related Fees
None.
Tax Fees
None.
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, 2007 and 2006 are filed with this report.
Exhibit Index
3(i)
Certificate of Incorporation, as amended on October 27, 2006 (incorporated by reference to Exhibit 3(i) to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
3(ii)
By-laws (incorporated by reference to Exhibit 3(ii) to the registrant’s Registration Statement on Form 10-SB, filed on January 12, 2006)
4.1
Form of common stock certificate (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
4.2
Form of Class A warrant to purchase common stock (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
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4.3
Form of Class B warrant to purchase common stock (incorporated by reference to Exhibit 4.3 to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
4.4
Registration Rights Agreement (incorporated by reference to Exhibit 4.4 to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
10.1
Lease of the registrant’s principal executive offices, as amended (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
10.2
Employment Agreement with B.K. Gogia (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
10.3
Employment Agreement with J. Bala (incorporated by reference to Exhibit 10.1 to Amendment No 1 to the registrant’s Current Report on Form 8-K, filed on November 1, 2006)
10.4
Employment Agreement with S. Parliament (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed on November 16, 2006)
10.5
Employment Agreement with J. Mena (incorporated by reference to Exhibit 10.5 to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
10.6
Subscription Agreement (incorporated by reference to Exhibit 10.7 to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
10.7
Agreement and Plan of Merger by and among Black Nickel Acquisition Corp. I, InferX Acquisition Corp. and InferX Corporation, dated October 24, 2006 (incorporated by reference to Exhibit 10.8 to the registrant’s Current Report on Form 8-K, filed on October 30, 2006)
10.8
Consulting Agreement with Michael D. Brown (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K, filed on December 18, 2006)
10.9
Executive Employment Agreement with Michael D. Brown (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed on March 19, 2008)
10.10
InferX Corporation 2007 Stock Incentive Plan
10.11
Form of Convertible Note (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K, filed on March 12, 2008)
10.12
Form of Security Agreement (incorporated by reference to Exhibit 99.2 to the registrant’s Current Report on Form 8-K, filed on March 12, 2008)
10.13
Task/Delivery Order for Supplies or Services issued by the U.S. Department of Veterans Affairs on October 24, 2007
31.1
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
Certification of the Chief Executive Officer and the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C.
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INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
InferX Corporation
McLean, Virginia
We have audited the accompanying consolidated balance sheet of InferX Corporation (the “Company”) as of December 31, 2007 and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit 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 audit provides 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, 2007, and the results of its consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year ended December 31, 2007 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 operating losses and capital deficits that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 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
April 10,
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
InferX Corporation
I have audited the accompanying consolidated balance sheet of InferX Corporation (formerly Black Nickel Acquisition Corp. I) (the "Company") as of December 31, 2006, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the years ended December 31, 2006 and 2005. These consolidated financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these consolidated financial statements based on my audits.
I conducted the audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. 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 financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006, and their results of operations and cash flows for the years ended December 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.
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 financial statements, the Company has sustained operating losses and capital deficits that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As noted in Note 13 to the financial statements, the Company has restated its financial statements for the year ended December 31, 2006 to reverse the expensing of common stock issued as a guarantee of debt in the amount of $66,250, and restated the financial statements for the year ended December 31, 2005 to reflect a loss on debt conversion of $38,462, for the year ended December 31, 2005, previously unrecorded. In addition, the Company removed the unearned revenue and unbilled receivables of equal value. These adjustments reflect corrections of errors.
/s/Michael Pollack CPA
Cherry Hill, New Jersey
February 16, 2007, except for Note 13, which is dated May 24, 2007
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
The accompanying notes are an integral part of these consolidated financial statements.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
The accompanying notes are an integral part of these consolidated financial statements.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
The accompanying notes are an integral part of these consolidated financial statements.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
The accompanying notes are an integral part of these consolidated financial statements.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE
ORGANIZATION AND BASIS OF PRESENTATION
Black Nickel Acquisition Corp. I was incorporated in Delaware on May 26, 2005, and was formed as a vehicle to pursue a business combination. From inception through October 24, 2006, Black Nickel Acquisition Corp. I, was engaged in organizational efforts and obtaining initial financing.
On May 17, 2006, Black Nickel Acquisition Corp. I entered into a letter of intent with InferX Corporation, a privately-held Virginia corporation (“InferX Virginia”), with respect to entering into a merger transaction relating to bridge financing for InferX Virginia and the acquisition of and merger with InferX Virginia. The transaction closed on October 24, 2006. Following the merger, Black Nickel Acquisition Corp. I effected a short-form merger of InferX Virginia with and into Black Nickel Acquisition Corp. I, pursuant to which the separate existence of InferX Virginia terminated and Black Nickel Acquisition Corp. I changed its name to InferX Corporation (“InferX” or the “Company”).
The transaction was recorded as a recapitalization under the purchase method of accounting, as InferX became the accounting acquirer. The reported amounts and disclosures contained in the consolidated financial statements are those of InferX Corporation, the operating company.
InferX was incorporated under the laws of Delaware in 1999. On December 31, 2005, InferX and Datamat Systems Research, Inc. (“Datamat”), a company incorporated in 1992 under the corporate laws of the Commonwealth of Virginia executed an Agreement and Plan of Merger (the “Merger”). InferX and Datamat had common majority ownership and directors. The financial statements herein reflect the combined entity, and all intercompany transactions and accounts have been eliminated. As a result of the Merger, InferX merged with and into Datamat, the surviving entity. Upon completion, Datamat changed its name to InferX Corporation.
InferX was formed to develop and commercially market computer applications software systems that were initially developed by Datamat with grants from the Missile Defense Agency. Datamat was formed as a professional services research and development firm, specializing in the Department of Defense. The Company currently provides services and software to the United States government, and is in process of formalizing business plans that will enable them to provide software and services to commercial entities as well.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
Going Concern
As shown in the accompanying consolidated financial statements the Company has incurred a loss of $1,704,737 and $2,211,158 for the years ended December 31, 2007 and 2006, respectively, and has a working capital deficiency of $825,259 as of December 31, 2007. The principal reasons for the recurring losses is due to the Company’s changed focus on developing its products for the commercial markets as it transitions away from the less profitable government services market. The Company expects the negative cash flow from operations to continue its trend through the next six months until proposals that are in process become executed agreements and revenue is recognized from these agreements. These factors raise significant doubt about the ability of the Company to continue as a going concern.
Management’s plans to address these conditions include continued efforts to obtain government contracts as well as commercial contracts through expanding sources and new sales personnel, along with new technology, and the raising of additional capital through the sale of the Company’s stock.
The Company’s long-term success is dependent upon the obtaining of sufficient capital to fund its operations; development of its products; and launching its products to the worldwide market. These factors will contribute to the Company’s obtaining sufficient sales volume to be profitable. To achieve these objectives, the Company may be required to raise additional capital through public or private financings or other arrangements.
It cannot be assured that such financings will be available on terms attractive to the Company, if at all. Such financings may be dilutive to existing stockholders and may contain restrictive covenants.
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.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include those of the Company and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of 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 $100,000.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
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, 2007, an allowance of $2,364 is required.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets (primarily three to five years). Costs of maintenance and repairs are charged to expense as incurred.
Computer Software Development Costs
During 2007 and 2006, the Company capitalized certain software development costs. The Company capitalizes the cost of software in accordance with SFAS 86 once technological feasibility has been demonstrated, as the Company has in the past sold, leased or otherwise marketed their software, and plans on doing so in the future. The Company capitalizes costs incurred to develop and market their privacy preserving software during the development process, including payroll costs for employees who are directly associated with the development process and services performed by consultants. Amortization of such costs is based on the greater of (1) the ratio of current gross revenues to the sum of current and anticipated gross revenues, or (2) the straight-line method over the remaining economic life of the software, typically five years. It is possible that those anticipated gross revenues, the remaining economic life of the products, or both, may be reduced as a result of future events. The Company has not developed any software for internal use. For the years ended December 31, 2007 and 2006, the Company recognized $177,003 and $177,003 of amortization expense on its capitalized software costs, respectively. The Company commencing January 1, 2008, placed an additional $226,084 of software development into service, which will be amortized over a three year period.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recoverability of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale are carried at the lower of the then current carrying value or fair value less estimated costs to sell.
Revenue Recognition
The Company generates revenue from professional services rendered to customers as well as from application management support contracts with governmental units. The Company’s revenue is generated under time-and-material contracts and fixed-price contracts.
Time-and-Material Contracts
Time-and-material contracts revenue is generated whereby costs are generally incurred in proportion with contracted billing schedules and revenue is recognized as services are performed, with the corresponding cost of providing those services reflected as direct costs. The customers are billed in accordance with the contracts entered into. Such method is expected to result in reasonably consistent profit margins over the contract term.
Fixed-Price Contracts
Revenue from firm-fixed-price contracts is recognized upon achievement of the milestones contained in the contracts in accordance with the provisions of Staff Accounting Bulletin 104. Revenue is not recognized until collectibility is assured, which does not take place until completion of the particular milestone. Costs are recognized as services are performed.
The Company does not derive revenue from projects involving multiple revenue-generating activities. If a contract would involve the provision of multiple service elements, total estimated contract revenue would be allocated to each element based on the fair value of each element.
The amount of revenue allocated to each element would then be limited to the amount that is not contingent upon the delivery of another element in the future. Revenue for each element would then be recognized depending upon whether the contract is a time-and-materials contract or a fixed-price, fixed-time contract.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) published Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R, as amended, are effective for small business issuers beginning as of the next interim period after December 15, 2005. The Company has adopted these provisions as of January 1, 2006 and this adoption did not have a material effect on the Company’s operations.
On January 1, 2006, the Company adopted the provisions of FAS No. 123R “Share-Based Payment” (“FAS 123R”) which requires recognition of stock-based compensation expense for all share-based payments based on fair value. Prior to January 1, 2006, the Company measured compensation expense for all of its share-based compensation using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. The Company has provided pro forma disclosure amounts in accordance with FAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123” (“FAS 148”), as if the fair value method defined by FAS No. 123, “Accounting for Stock Based Compensation” (“FAS 123”) had been applied to its stock-based compensation.
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 estimated in accordance with the original provisions of FAS 123. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values estimated in accordance with the provisions of FAS 123R. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.
The Company’s warrants issued in the private placement in October 2006, were not stock based compensation. The Company’s options issued in October 2007 were considered stock based compensation (see Note 7).
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations
The Company has derived all of its revenue from two customers with 95% and 100% for the years ended December 31, 2007 and 2006, respectively, of the revenue from one of these 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 SFAS 131, “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 believes that there is only one operating segment.
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 the Company for similar borrowings. For the warrants that are classified as derivatives, fair values were calculated at net present value using the Company’s 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.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Under Financial Accounting Standards Board Statement No. 109, “Accounting for Income Taxes,” the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Uncertainty in Income Taxes
In July 2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. Management has adopted FIN 48 for 2007, and they evaluate their tax positions on an annual basis, and has determined that as of December 31, 2007, no additional accrual for income taxes is necessary.
(Loss) Per Share of Common Stock
Basic net (loss) per common share (“EPS”) is computed using the weighted average number of common shares outstanding for the period. Diluted earnings per share includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for the periods presented.
The Class A and Class B warrants were issued in October 2006 in the private placement however were not included as they would be considered anti-dilutive as the Company had a loss for this period.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a reconciliation of the computation for basic and diluted EPS:
Research and Development
Research and development costs are expensed as incurred. In addition, research and development costs of $32,127 and $49,366 have been included in indirect labor and $183,548 and $104,782 have been included in direct labor and subcontractor costs for the years ended December 31, 2007 and 2006, respectively.
Recent Issued Accounting Standards
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is encouraged. The adoption of SFAS 157 is not expected to have a material impact on the consolidated financial statements.
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115”, (“FAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Issued Accounting Standards (Continued)
In December 2006, the FASB Staff issued FSP EITF - 00-19-2, “Accounting for Registration Payment Arrangements” (“EITF 00-19-2”). EITF 00-19-2 addresses an issuer’s accounting for registration payment arrangements. EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, Accounting for Contingencies. EITF 00-19-2 is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. Application of EITF 00-19-02 resulted in an adjustment in January 2007 reclassifying the derivative liability to additional paid-in capital and retained earnings. The adjustment reduced the derivative liability by $1,031,703 and increased additional paid-in capital by $547,086 and increased retained earnings by $484,617 which was the cumulative-effect adjustment resulting from the adoption of this standard.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No 51” (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment.
SFAS is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Management is determining the impact that the adoption of SFAS No. 160 will have on the Company’s consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”), which replaces FASB SFAS 141, Business Combinations. This Statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R will require an entity to record separately from the business combination the direct costs, where previously these costs were included in the total allocated cost of the acquisition. SFAS 141R will require an entity to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquired at the acquisition date, at their fair values as of that date. This compares to the cost allocation method previously required by SFAS No. 141.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Issued Accounting Standards (Continued)
SFAS 141R will require an entity to recognize as an asset or liability at fair value for certain contingencies, either contractual or non-contractual, if certain criteria are met. Finally, SFAS 141R will require an entity to recognize contingent consideration at the date of acquisition, based on the fair value at that date. This Statement will be effective for business combinations completed on or after the first annual reporting period beginning on or after December 15, 2008. Early adoption of this standard is not permitted and the standards are to be applied prospectively only. Upon adoption of this standard, there would be no impact to the Company’s results of operations and financial condition for acquisitions previously completed. The adoption of SFAS No. 141R is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expresses the current view of the staff that it will accept a company's election to use the simplified method discussed in Staff Accouting Bulletin No. 107, “Share Based Payment", (“SAB107”), for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. SAB 110 became effective for the Company on January 1, 2008. The adoption of SAB 110 is not expected to have a material impact on the Company's final position.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE
FIXED ASSETS
Fixed assets consist of the following as of December 31, 2007 and 2006:
Depreciation expense was $19,234 and $15,290 for the years ended December 31, 2007 and 2006, respectively.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
COMPUTER SOFTWARE DEVELOPMENT COSTS
Computer software development costs consist of the following as of December 31, 2007 and 2006:
Amortization expense was $177,003 and $177,003 for the years ended December 31, 2007 and 2006, respectively. At March 31, 2007, the Company wrote off net software development costs of $10,473 relating to their Inferview product. The Company commencing January 1, 2008, placed an additional $226,084 of software development into service, which will be amortized over a three year period.
Amortization expense anticipated through December 31, 2010 is as follows:
NOTE
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 2033.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
NOTES PAYABLE (CONTINUED)
SBA Loan (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.
As of December 31, 2007 and 2006, the Company has an outstanding principal balance of $358,511 and $366,431, respectively. Interest expense on the SBA loan for the years ended December 31, 2007 and 2006 were $12,628 and $13,202, respectively.
Automobile Loan
The Company has a note payable with an automotive finance company in the original amount of $44,990 (the “Auto Note”). The Auto Note commenced in November 2003, and requires payments of $750 per month for a period of 60 months. The Auto Note is secured by the automobile.
As of December 31, 2007 and 2006, the outstanding principal balance of the Auto Note was $7,499 and $16,497.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
NOTE PAYABLE (CONTINUED)
As of December 31, 2007, the repayment schedule of the Notes Payable for the next five years and in the aggregate are:
NOTE
NOTE PAYABLE - RELATED PARTIES
The President of the Company would lend money from time to time to the Company to fund operations. These amounts bore no interest and were unsecured. As of December 31, 2005, the amount outstanding to the President of the Company was $45,000. These balances were repaid in the three months ended March 31, 2006.
NOTE
STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
The Company was incorporated on May 26, 2005, and the Board of Directors authorized 10,000,000 shares of preferred stock with a par value of $0.0001. The Company has not issued any shares of preferred stock since inception.
Common Stock
The Company was incorporated on May 26, 2005, and the Board of Directors authorized 75,000,000 shares of common stock with a par value of $0.0001.
On May 26, 2005, the Company issued 1,500,000 to the founders of the Company for $50,000.
On October 24, 2006, Black Nickel Acquisition Corp. I merged with the Company. At the closing of the merger and related private placement, the following occurred:
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
Common Stock (Continued)
a)
The Company issued 250,000 shares of common stock for the providing of the bridge promissory notes to InferX in May 2006. The value of these shares was $529,423 based on the fair value of the Company’s stock when issued. The 250,000 shares represent the conversion of the 132 shares issued pre-merger between the companies;
b)
The Company issued 5,350,000 shares of common stock in exchange for 100% of the issued and outstanding shares of InferX;
c)
The Company issued 2,329,392 shares of common stock for gross proceeds of $1,164,696 in the private placement that closed when the merger was completed. From the $1,164,696, the Company repaid the bridge promissory notes plus accrued interest in the amount of $362,196, and paid $147,493 in closing costs. The Company issued 2,392,392 Class A warrants and 2,329,392 Class B warrants (see d and e below and the Warrants section of Note 7). The price for all components were derived utilizing the relative fair value approach stipulated in APB 14;
d)
The Class A Warrants are exercisable at any time for shares of stock at an exercise price of $0.50 per share with a term of five (5) years, subject to anti dilution protection, so that any part of the 2,329,392 of the warrants shall be callable if the underlying warrant shares are registered and the stock trades in the open market for thirty (30) consecutive days at a closing price above $1.50 per share. Half of the warrants shall be callable if the Company is awarded a contract with a guaranteed minimum revenue of at least $1,000,000 with a department of the United Sates Government (not including the Missile Defense Agency) to deploy its existing technology for threat detection or other application. 1,629,513 of these warrants were exercised at a price of $.25 in April 2007, and 444,879 of these warrants were exercised at a price of $.50 in November 2007;
e)
The Class B Warrants are exercisable at any time for shares of stock at an exercise price of $0.62 per share with a term of five (5) years, subject to anti dilution protection, so that any part of the 2,329,392 of the warrants shall be callable by the Company if the underlying warrant shares are registered and the stock trades in the open market for thirty (30) consecutive days at a closing price above $1.86 per share;
f)
The Company cancelled 300,000 shares of common stock in the reverse merger leaving 1,200,000 of the 1,500,000 previously outstanding shares from May 25, 2006 with the former owners of Black Nickel Acquisition Corp. I; and
g)
Shall reserve for a period of two (2) years from the closing of the Reverse Merger, no more than 2,200,000 shares of stock for a stock option plan, and any options granted under this plan will be subject to an exercise price of not less than $0.50 per share. 290,000 Options were issued under this plan during the year ended December 31, 2007 at an exercise price of $.50.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
Common Stock (Continued)
In April 2007, the Company issued 1,629,513 shares of stock in the exercise of Class A warrants issued in connection with the private placement. The Company received $406,378 in cash for these shares. In November 2007, the Company issued 444,879 shares of stock in the exercise of Class A warrants issued in connection with the private placement. The Company received $222,440 in cash for these shares.
The Company issued 268,404 as penalty shares under the registration rights agreement (see Note 9) at a value of $.50 per share or $134,202.
The Company has also recorded a $15,000 consulting fee in 2007 for the issuance of 30,000 shares of stock. The fees were earned in 2007 however the stock has not been issued. This is reflected as a liability for stock to be issued.
As of December 31, 2007, the Company has 11,472,188 shares issued and outstanding.
Warrants
The Company in the private placement granted 2,329,392 Class A and 2,329,392 Class B warrants. In April 2007, 1,629,513 of the Class A warrants were exercised into common shares. In November 2007, 444,879 of the Class A warrants were exercised into common shares. The Company granted brand new Class A warrants to the warrant holders that exercised during 2007. The total new Class A warrants of 2,074,392 were issued in November 2007 and are reflected herein. The following is a breakdown of the warrants:
The Class A Warrants (old) and Class B Warrants in the private placement as well as the consultant warrants were valued utilizing the Black - Scholes method as follows:
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
Options
Prior to October 2007, there were no options outstanding, or granted. In October 2007, the Company’s Board of Directors and Shareholders approved the adoption of an option plan for a total of 2,200,000 shares and issued 290,000 options in October and November that vest over a three-year period of time, with 140,834 of these options vesting in 2007 at a strike price of $.50 per share. These options were valued as follows:
The value attributable to these options for the year ended December 31, 2007 is $27,613 and is reflected in the consolidated statements of operations.
NOTE
RELATED PARTY TRANSACTIONS
The Company was advanced amounts as equity contributions by the Company’s President prior to the merger with Black Nickel Acquisition Corp. I. As of December 31, 2007 and 2006, there are currently no outstanding amounts due the President of the Company. There were no other related party transactions during the years ended December 31, 2007 and 2006, respectively.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
COMMITMENTS
Rental
The Company leases office space under an operating lease that has initial or remaining non-cancelable lease terms and expires in November 2008. The lease agreement provides for an annual 4% escalation of the base rent. As of December 31, 2007, the following presents the approximate future minimum lease payments required under this lease:
Rent expense for the years ended December 31, 2007 and 2006 was $106,789 and $104,181, respectively.
Consulting Agreements
During 2007 and 2006, the Company entered into consulting agreements with marketing and strategic consulting groups with terms that do not exceed one year. These companies are to be paid fees for the services they perform. The Company has included these fees in their consolidated statements of operations for the years ended December 31, 2007 and 2006.
Registration Rights Agreement
The Registration Rights Agreement dated October 23, 2006 between the Company and certain investors provided that the Company would accrue a penalty of 1% of the total shares of the Company’s common stock registered on Form SB-2 (the “Total Shares”), per month for each month beyond April 23, 2007 that Company’s registration statement on Form SB-2 failed to be effective up to a maximum of 10% of the Total Shares or 447,340 shares of common stock. The Company had incurred a penalty of 268,404 shares of its common stock through September 10, 2007, the effective date of the Company’s registration statement. This liability had been accrued at a value of $.50 per share or $134,202. The penalty shares noted above were issued in October 2007.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
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, 2007, deferred tax assets consist of the following:
At December 31, 2007, the Company had net operating loss carryforward in the amount of $4,022,194, available to offset future taxable income through 2027. 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, and 2006 is summarized below.
NOTE
DEFINED CONTRIBUTION PLAN
The Company has a retirement plan which satisfies the requirements of Section 401(k) of the Internal Revenue Code. This defined contribution retirement plan covers substantially all employees. Participants can elect to have up to the maximum percentage allowable of their salaries reduced and contributed to the plan. The Company may make matching contributions equal to a discretionary percentage of the participants’ elective deferrals. The Company made no such contributions for the years ended December 31, 2007 and 2006, respectively.
INFERX CORPORATION
(FORMERLY BLACK NICKEL ACQUISITION CORP. I)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2007 AND 2006
NOTE
MAJOR CUSTOMER
The Company’s contracts with agencies of the federal government accounted for 100% of its revenue for the years ended December 31, 2007 (two agencies) and 2006 (one agency), respectively.
NOTE
SUBSEQUENT EVENTS
Convertible Notes
The Company entered into three convertible notes:
a)
Convertible note dated March 6, 2008 in the amount of $75,000, with a term of 2 years, with interest calculated at 9.99% per annum. The note is convertible at 50% of the closing bid price of the common stock on the date of conversion;
b)
Convertible note dated March 7, 2008 in the amount of $62,500, with a term of 2 years, with interest calculated at 9.99% per annum. The note was convertible at 50% of the closing bid price of the common stock on the date of conversion, and was converted the same day the note was executed for a conversion price of $.135 or 462,963 shares; and
c)
Convertible note dated March 10, 2008 in the amount of $100,000, with a term of 2 years, with interest calculated at 9.99% per annum. The note was convertible at 50% of the closing bid price of the common stock on the date of conversion, and was converted the same day the note was executed for a conversion price of $.135 or 740,741 shares.
Computer Software Development Costs
The Company commencing January 1, 2008, placed an additional $226,084 of software development into service, which will be amortized over a three year period.
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.
Date: April 14, 2008
By:
/s/
Michael D. Brown
President and Chief Executive Officer
(Principal Executive Officer)
Date: April 14, 2008
By:
/s/
B.K. Gogia
Director
Date: April 14, 2008
By:
/s/
Scott B. Parliament
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
Date: April 14, 2008
By:
/s/
Jerzy W. Bala
Director
InferX Corporation
Form 10-K
For the fiscal year ended December 31, 2007
Exhibit Index
3(i)
Certificate of Incorporation, as amended on October 27, 2006 *
3(ii)
By-laws *
4.1
Form of common stock certificate *
4.2
Form of Class A warrant to purchase common stock *
4.3
Form of Class B warrant to purchase common stock *
4.4
Registration Rights Agreement *
10.1
Lease of the registrant’s principal executive offices, as amended *
10.2
Employment Agreement with B.K. Gogia *
10.3
Employment Agreement with J. Bala *
10.4
Employment Agreement with S. Parliament *
10.5
Employment Agreement with J. Mena *
10.6
Subscription Agreement *
10.7
Agreement and Plan of Merger by and among Black Nickel Acquisition Corp. I, InferX Acquisition Corp. and InferX Corporation, dated October 24, 2006 *
10.8
Consulting Agreement with Michael D. Brown *
10.9
Executive Employment Agreement with Michael D. Brown *
10.10
InferX Corporation 2007 Stock Incentive Plan **
10.11
Form of Convertible Note *
10.12
Form of Security Agreement *
10.13
Task/Delivery Order for Supplies or Services issued by the U.S. Department of Veterans Affairs on October 24, 2007 **
31.1
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) **
31.2
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) **
Certification of the Chief Executive Officer and the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350 **
* Previously filed
** Filed herewith