As
filed pursuant to Rule 424(b)(3) under the Securities Act of 1933
Prospectus
INFRARED
SYSTEMS INTERNATIONAL
Spin-Off of INFRARED SYSTEMS
INTERNATIONAL by the
Distribution of
20,073,346
Shares of Common Stock
We are
furnishing this Prospectus to the holders of common stock of China Sxan Biotech,
Inc. (CSBI), a Delaware corporation. Infrared Systems International
currently is a wholly-owned subsidiary of CSBI. After the
distribution, we will be an independent public company.
CSBI owns
the shares. Stockholders of CSBI will receive one (1) of our shares for every
one (1) share of CSBI common stock which they own on December 22, 2008, the
record date of the distribution. We do not believe that the distribution will
qualify as a tax-free spin-off under U.S. tax laws. Infrared Systems
International is bearing all costs incurred in connection with this
distribution.
The
20,073,346 shares which are the subject of this Prospectus include (i) a maximum
of 153,551 shares issuable if all holders of CSBI Series A Preferred Stock
convert those shares into CSBI common stock prior to the record date of the
distribution (of which 1,530 shares are issuable to our directors and officers),
(ii) an aggregate of 18,767,516 shares issuable to certain stockholders in
consideration for shares of CSBI common stock held by them, which shares they
are obligated to surrender to us for cancellation, and (iii) an aggregate of
1,152,279 shares issuable to holders of CSBI common stock who are not obligated
to surrender such shares to us for cancellation. As a result,
immediately after the distribution and the cancellation of certain shares, there
will be between 1,152,279 and 1,305,830 shares of our common stock outstanding,
of which up to 359,965 shares will be owned by our directors and
officers.
Before
this offering, there has been no public market for our common stock, and our
common stock is not listed on any stock exchange or on the over-the-counter
market. This distribution of our common shares is the first public distribution
of our shares. It is our intention to seek a market maker to publish quotations
for our shares on the OTC Electronic Bulletin Board; however, we have no
agreement or understanding with any potential market maker. Accordingly, we can
provide no assurance to you that a public market for our shares will develop and
if so, what the market price of our shares may be.
Investing
in our common stock involves a high degree of risk.
You
should read the "Risk Factors" beginning on Page 5.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of the securities or passed on the adequacy or accuracy
of the disclosures in the prospectus. Any representation to the contrary is a
criminal offense.
TABLE
OF CONTENTS
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Questions
and Answers About the Spin-Off
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3
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Summary
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4
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Risk
Factors
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5
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Forward-Looking
Statements
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9
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The
Spin-Off and Plan of Distribution
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10
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Certain
Market Information
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14
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Management’s
Discussion and Analysis or Plan of Operation
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15
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Business
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20
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Management
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24
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Certain
Relationships and Related Transactions
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27
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Principal
Stockholders
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27
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Federal
Income Tax Considerations
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29
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Federal
Securities Laws Consequences
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31
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Description
of Securities
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31
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Legal
Matters
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32
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Experts
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33
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Where
You Can Find More Information
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33
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Financial
Statements
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F-1
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Questions
And Answers About The Spin-Off
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Q:
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What Are Shares Of Infrared
Systems International Worth?
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A:
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The
value of our shares will be determined by their trading price after the
spin-off. We do not know what the trading price will be and we can provide
no assurances as to value.
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Q:
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Will
ISI Shares Be Listed On A National Stock Exchange Or The Nasdaq Stock
Market?
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A:
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Our
shares will not be listed on any national stock exchange or the Nasdaq
Stock Market. It is our hope that the shares will be quoted by one or more
market makers on the OTC Electronic Bulletin Board, although we have no
agreements or understandings with any market maker to do
so.
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Q:
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What
Are The Tax Consequences To Me Of The Spin-Off?
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A:
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We
do not believe that the distribution will qualify as a tax-free spin-off
under U.S. tax laws. Consequently, the total value of the distribution, as
well as your initial tax basis in our shares, will be determined by the
fair market value of our common shares at the time of the
spin-off. This distribution will be taxable to you as a
dividend to the extent of CSBI’s earnings and profits, with the balance a
tax-free reduction in your basis in your CSBI shares and, to the extent
the distribution is greater than these amounts, taxable
gain.
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Q:
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What
Do I Have To Do To Receive My ISI Shares?
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A:
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No
action by you is required. You do not need to pay any money or surrender
your CSBI common shares to receive our common shares. We will mail your
ISI shares to your record address as of the record
date.
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Q:
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When
Will The Distribution Occur?
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A:
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The
record date for the distribution is December 22,
2008. Certificates for the ISI shares should be mailed within
30 days after the record
date.
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Summary
Please note that throughout this
prospectus the words "we," "our," or "us" refer to Infrared Systems
International (“ISI”).
ISI is engaged in the business of
developing and licensing infrared imaging systems for commercial market
applications. We will seek to license proprietary technology for
applications in a specified field – generally transportation, security and
medical. Most of our proposed projects will require a strategic
partner to provide the marketing, sales and after-sales support for the
project. We currently hold certain licenses that should provide
modest revenues. During 2007, all revenues were generated from a
single license, and we expect all of our revenues in 2008 to be from two
licenses. See “Business” below.
We are a
wholly-owned subsidiary of China Sxan Biotech, Inc. (“CSBI”). Our
principal executive offices are located at 15 N. Longspur Drive, The Woodlands,
Texas 77380, and our telephone number is (310) 213-2143.
The
Reason for the Spin-Off
Until
July 2007 CSBI was engaged exclusively in the business of developing infrared
vision systems for commercial applications. On July 10, 2007, CSBI
acquired the outstanding capital stock of American SXAN Biotech, Inc., which
owed 100% of the stock of Tieli Xiaoxinganling Forest Breeding Co., Ltd., a
corporation organized under the laws of The People’s Republic of China.
Tieli Xiaoxinganling is engaged in the business of manufacturing and
marketing wines and tonics derived from domesticated forest
frogs. American SXAN was not interested in continuing the infrared
visions systems business of CSBI, so the parties agreed that such business and
assets would be transferred to CSBI’s wholly-owned subsidiary, ISI, and that the
common stock of CSBI would be distributed to the persons who were shareholders
of CSBI prior to the July 2007 merger, and any subsequent purchasers of their
shares. The agreements between the parties contemplated that neither Dr. Huakang
Zhou, who purchased CSBI common stock in connection with the acquisition of
American SXAN, nor persons to whom CSBI sold CSBI Series B Preferred Stock in
connection with the acquisition, would participate in the distribution of ISI
common stock. Consequently, a total of seven persons who currently
hold an aggregate of 18,767,516 shares of CSBI common stock have agreed that
they will surrender to ISI for cancellation all ISI shares
distributed to them with respect to such CSBI shares. See “Spin-Off and Plan of
Distribution” below.
All
references to shares of common stock of CSBI in this prospectus have been
adjusted to reflect a 1-for-51 reverse stock split effected by CSBI in September
2007 with respect to its common stock.
The
shares of ISI are owned by CSBI, who will distribute the ISI shares once the
Form S-1 registration statement is effective with the Securities and Exchange
Commission. The shares will be distributed by Pacific Stock Transfer Company,
which acts as our transfer agent.
Risk
Factors
The
shares offered in this prospectus involve a high degree of
risk. Accordingly, you should carefully consider the risks and
uncertainties described below, in addition to the other information contained in
this prospectus.
If
we do not generate adequate revenues to finance our operations, our business may
fail.
We
were incorporated on April 11, 2006. Our business primarily involves
marketing activities. As of March 31, 2008, we had a retained deficit of
$917,674. During the six months ended March 31, 2008, we had a net
loss of $55,112. During the years ended September 30, 2007 and 2006,
respectively, we had net losses of $31,278 and $16,276. Operating costs are
expected to range between $35,000 and $55,000 during the fiscal year ending
September 30, 2008, exclusive of expenses associated with this offering of
approximately $70,000. We expect to generate revenues during the next
twelve months from one or two existing licenses. However, our
expected revenue generation and expenses are difficult to predict, and there can
be no assurance that revenues will be sufficient to cover operating costs for
the foreseeable future. Consequently, it may be necessary to raise
additional funds. If we are unable to raise funds to cover any
operating deficit after the fiscal year ending September 30, 2008, our business
may fail.
Because
we had incurred a loss and have not commenced our planned principal operations,
our accountants have expressed doubts about our ability to continue as a going
concern.
For
the fiscal year ended September 30, 2007, our accountants have expressed doubt
about our ability to continue as a going concern as a result of operating losses
since inception, the failure to yet commence planned principal operations, and
current liabilities in excess of current assets. Our ability to
achieve and maintain profitability and positive cash flow is dependent on such
factors as our ability to enter into license agreements and our licensees’
ability to sell products utilizing our technology. Based upon current plans, we
expect our operating costs to range between $35,000 and $55,000 for the fiscal
year ending September 30, 2008, exclusive of expenses associated with this
offering of approximately $70,000. We cannot guarantee that we will be
successful in generating sufficient revenues or other funds in the future to
cover these operating costs. Failure to generate sufficient revenues will cause
us to go out of business.
The
lack of a broker or dealer to create or maintain a market in our stock could
adversely impact the price and liquidity of our securities.
We
have no agreement with any broker or dealer to act as a market maker for our
securities and there is no assurance that we will be successful in obtaining any
market makers. Thus, no broker or dealer will have an incentive to make a market
for our stock. The lack of a market maker for our securities could adversely
influence the market for and price of our securities, as well as your ability to
dispose of, or to obtain accurate information about, and/or quotations as to the
price of, our securities.
As
our stock will not be listed on Nasdaq or another national exchange, trading in
our shares will be subject to rules governing "penny stocks," which will impair
trading activity in our shares.
As
we do not intend to list our stock on Nasdaq or another national exchange, our
stock will therefore be subject to rules adopted by the Securities and Exchange
Commission regulating broker dealer practices in connection with transactions in
"penny stocks." Those disclosure rules applicable to "penny stocks" require a
broker dealer, prior to a transaction in a "penny stock" not otherwise exempt
from the rules, to deliver a standardized list disclosure document prepared by
the Commission. That disclosure document advises an investor that investment in
"penny stocks" can be very risky and that the investor's salesperson or broker
is not an impartial advisor but rather paid to sell the shares. The disclosure
contains further warnings for the investor to exercise caution in connection
with an investment in "penny stocks," to independently investigate the security,
as well as the salesperson with whom the investor is working and to understand
the risky nature of an investment in this security. The broker dealer must also
provide the customer with certain other information and must make a special
written determination that the "penny stock" is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
Further, the rules require that, following the proposed transaction, the broker
provide the customer with monthly account statements containing market
information about the prices of the securities.
These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for our common stock. Many brokers may be
unwilling to engage in transactions in our common stock because of the added
disclosure requirements, thereby making it more difficult for stockholders to
dispose of their shares. You will also find it difficult to obtain accurate
information about, and/or quotations as to the price of, our common
stock.
Issuances
of our stock could dilute current stockholders and adversely affect the market
price of our common stock, if a public trading market develops.
We
have the authority to issue up to 50,000,000 shares of common stock, 50,000,000
shares of preferred stock, and to issue options and warrants to purchase shares
of our common stock without stockholder approval. Although no financing is
planned currently, we may need to raise additional capital to fund operations.
If we raise funds by issuing equity securities, our existing stockholders who
receive shares in the spin-off may experience substantial dilution. In addition,
we could issue large blocks of our common stock to fend off unwanted tender
offers or hostile takeovers without further stockholder approval, or in
connection with one or more acquisitions. No such transactions
currently are planned.
The
issuance of preferred stock by our board of directors could adversely affect the
rights of the holders of our common stock. An issuance of preferred stock could
result in a class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over the common stock
and could, upon conversion or otherwise, have all of the rights of our common
stock. Our board of directors' authority to issue preferred stock could
discourage potential takeover attempts or could delay or prevent a change in
control through merger, tender offer, proxy contest or otherwise by making these
attempts more difficult or costly to achieve.
The
trading price for CSBI common stock may decline after the
distribution.
As a result of the distribution, we
will no longer be a wholly-owned subsidiary of CSBI. To the extent
that investors perceive the value of CSBI without ISI to be diminished, the
trading price for CSBI common stock may decline after the
distribution.
We
do not believe that the distribution will qualify as a tax-free spin-off under
U.S. tax laws.
As a
taxable distribution, the total value of the distribution, as well as your
initial tax basis in our shares, will be determined by the fair market value of
our common shares at the time of the spin-off. This
distribution will be taxable to you as a dividend to the extent of CSBI’s
earnings and profits, with the balance a tax-free reduction in your basis in
your CSBI shares and, to the extent the distribution is greater than these
amounts, taxable gain.
Our
Articles of Incorporation protect our directors from certain types of lawsuits,
which could make it difficult for us to recover damages from them in the event
of a lawsuit.
Our
Articles of Incorporation eliminate the liability of our directors for monetary
damages to the fullest extent permissible under Nevada law. Nevada
law permits the elimination of the personal liability of a director or officer
for damages for breach of fiduciary duty as a director or officer, although such
a provision must not eliminate the liability of a director or officer for (a)
acts or omissions which involve intentional misconduct, fraud or a knowing
violation of law, or (b) the payment of distributions in violation of Nevada
Revised Statutes Section 78.300. This exculpatory provision may have
the effect of preventing stockholders from recovering damages against our
directors caused by their negligence, poor judgment or other circumstances. The
indemnification provisions may require our company to use our assets to defend
our directors and officers against claims, including claims arising out of their
negligence, poor judgment, or other circumstances.
Competition
in the infrared products industry is intense.
Our
business plan involves developing and licensing infrared products. This business
is highly competitive. There are numerous similar companies providing such
products in the United States. Our competitors will have greater financial
resources and more expertise in this business. Our ability to develop our
infrared products business will depend on our ability to successfully market our
products in this highly competitive environment. We cannot guarantee that we
will be able to do so successfully.
Our
intellectual property may not be adequately protected.
While we have a patent pending, we
cannot assure that a patent will be issued on the basis of our application or
that, if such a patent is issued, it will be sufficiently broad to protect our
technology. In addition, we cannot assure that any patents issued to
us will not be challenged, invalidated, or circumvented. In order to
safeguard our unpatented proprietary know-how, trade secrets, and technology, we
rely primarily upon trade secret protection and nondisclosure provisions in
agreements with employees and others having access to confidential
information. We cannot assure that these measures will adequately
protect us from improper disclosure or misappropriation of our proprietary
information.
Enforcing
and protecting our proprietary information can be costly. If we are not able to
adequately protect or enforce our proprietary information or if we become
subject to infringement claims by others, our business, results of operations
and financial condition may be materially adversely affected.
We may need to engage in future
litigation to enforce our intellectual property rights or the rights of our
customers, to protect our trade secrets or to determine the validity and scope
of proprietary rights of others, including our customers. We also may need to
engage in litigation in the future to enforce any patent rights. In addition, we
may receive in the future communications from third parties asserting that our
products infringe the proprietary rights of third parties. We cannot assure you
that any such claims would not result in protracted and costly litigation. Such
litigation could result in substantial costs and diversion of our resources and
could materially and adversely affect our business, financial condition and
results of operations. Furthermore, we cannot assure you that we will have the
financial resources to vigorously defend or enforce our proprietary
technology.
The
share control position of Gary Ball and his wife will limit the ability of other
stockholders to influence corporate actions.
After distribution of our shares to the CSBI stockholders, our largest
stockholders, Gary and Wendy Ball, will own an aggregate of 338,780 shares of
our common stock (including shares of common stock held in the IRA account for
Wendy Ball) and thereby control between approximately 26% and 32% of our
outstanding shares. Because Gary and Wendy Ball will own such a significant
percentage of the outstanding shares, other stockholders, individually or as a
group, will be at a disadvantage in their ability to effectively influence the
election or removal of our directors, the supervision and management of our
business or a change in control of or sale of our company, even if they believed
such changes were in the best interest of our stockholders
generally.
Our
future success depends, in large part, on the continued service of our
President.
We depend almost entirely on the efforts and continued employment of Mr. Gary
Ball, our President and Secretary-Treasurer. Mr. Ball currently is our sole
executive officer, and we will depend on him for nearly all aspects of our
operations. We do not have an employment contract with Mr. Ball, and we
do not carry key person insurance on his life. Mr. Ball currently is able
to devote substantially all of his time on our behalf. The loss of
the services of Mr. Ball, through incapacity or otherwise, would have a
material adverse effect on our business. It would be very difficult to find
and retain qualified personnel such as Mr. Ball.
Forward-looking
Statements
This
prospectus contains statements that plan for or anticipate the future.
Forward-looking statements include statements about our future business plans
and strategies, and most other statements that are not historical in nature. In
this prospectus, forward-looking statements are generally identified by the
words "anticipate," "plan," "believe," "expect," "estimate," and the like.
Although we believe that any forward-looking statements we make in this
prospectus are reasonable, because forward-looking statements involve future
risks and uncertainties, there are factors that could cause actual results to
differ materially from those expressed or implied. For example, a few of the
uncertainties that could affect the accuracy of forward-looking statements,
besides the specific factors identified above in the Risk Factors section of
this prospectus, include:
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changes
in general economic and business conditions affecting the infrared
products industry;
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changes
in legislation and regulation affecting the infrared products
industry;
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changes
in our business strategies;
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the
level of demand for our products; and
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the
availability of working capital.
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In
light of the significant uncertainties inherent in the forward-looking
statements made in this prospectus, particularly in view of our early stage of
operations, the inclusion of this information should not be regarded as a
representation by our company or any other person that our objectives and plans
will be achieved.
The
Spin-Off and Plan of Distribution
Summary
of Spin-Off
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Distributing
Company
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Infrared
Systems International
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Shares
To Be Distributed
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A
maximum of 20,073,346 shares of our common stock, $0.001 par value per
share, of which 18,767,516 shares will be returned to us for cancellation
by certain stockholders pursuant to written agreements. The shares to be
distributed in the spin-off will represent 100% of our total common shares
outstanding.
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Distribution
Ratio
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One
(1) of our common shares for every one (1) common share of CSBI owned of
record on December 22, 2008. No cash distributions will be paid.
Fractional shares will be rounded to the next whole
share.
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No
Payment Required
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No
holder of CSBI common shares will be required to make any payment,
exchange any shares or to take any other action in order to receive our
common shares.
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Conversion
of CSBI Series A Preferred Stock Into CSBI Common Stock
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Holders
of CSBI Series A Preferred Stock who convert their Series A Preferred
Stock into CSBI common stock prior to the record date and do not sell or
otherwise transfer such CSBI common stock prior to the record date will
receive ISI common stock on the same terms as all other holders of CSBI
common stock. Holders of CSBI Series A Preferred Stock who do
not convert their Series A Preferred Stock into CSBI common stock prior to
the record date will not be entitled to receive ISI common stock with
respect to such CSBI Series A Preferred Stock, whether or not such CSBI
Series A Preferred Stock is subsequently converted into CSBI common
stock.
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Record
Date
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The
record date for our distribution of our shares is December 22, 2008. After
the record date, the CSBI common shares will be trading "ex dividend,"
meaning that persons who have bought their common shares after the record
date are not entitled to participate in the distribution.
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Prospectus
Mailing Date
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Distribution
of ISI Shares
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A
maximum of 20,073,346 shares of our common shares, which are held by CSBI,
will be delivered to the distribution agent within ten (10) days after the
record date, and the spin-off will be completed, reduced by 18,767,516
shares that will be delivered to us for cancellation pursuant to written
agreements with certain CSBI stockholders. You will be entitled to receive
our shares even if you sold your CSBI shares after the record date. A
certificate representing your shares of our common stock will be mailed to
your address of record as of the record date. The mailing process is
expected to take about thirty (30) days. Any shares of our
common stock not delivered to the distribution agent for distribution will
be surrendered by CSBI to us for cancellation.
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Distribution
Agent
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The
distribution agent for the spin-off will be Pacific Stock Transfer
Company.
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Listing
and Trading of Our Shares
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There
is currently no public market for our shares. We do not expect a market
for our common shares to develop until after the distribution of the
certificates for our common stock. Our shares will not qualify for trading
on any national or regional stock exchange or on the Nasdaq Stock Market.
We will attempt to have one or more broker/dealers agree to serve as
market makers and quote our shares on the over-the-counter market on the
OTC Electronic Bulletin Board maintained by the FINRA. However, we have no
present agreement, arrangement or understanding with any broker/dealer to
serve as a market maker for our common shares. If a public trading market
develops for our common shares, of which there can be no assurance, we
cannot ensure that an active trading market will be available to you. Many
factors will influence the market price of our shares, including the depth
and liquidity of the market that may develop, investor perception of our
business, growth prospects and general market conditions.
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Background
and Reasons for the Spin-Off
ISI was incorporated under the laws of the State of Nevada on April 11, 2006.
Our Articles of Incorporation authorize our company to issue 50,000,000 shares
of common stock with $0.001 par value per share and 50,000,000 shares of
preferred stock with $0.001 par value per share. At the time of
formation, we were a wholly-owned subsidiary of Advance Technologies, Inc., a
Nevada corporation, and had been formed by it in order to focus on the
development of an infrared security system for which a patent was being
sought.
On May
24, 2007 Advance Technologies entered into a share purchase and merger agreement
with American SXAN Biotech, Inc., Huakang Zhou, Gary Ball and Wendy
Ball. Dr. Zhou has been advising private Chinese companies in the
course of going public in the U.S. since 2001. His role has been to
serve as a financial consultant and director of these Chinese
companies. Advance Technologies had several offers to merge with
other private corporations. The directors selected American SXAN
based on their perception of which opportunity provided the best potential for
“shareholder value enhancement.” Dr. Zhou was not affiliated
with any other merger candidate considered by management of Advance
Technologies.
The
long-term strategic and financial benefit of the transaction to American SXAN
was the ability to access world capital markets by reason of its status as a
U.S. public company. The long-term strategic and financial benefit to
Advance Technologies arose from the benefit of obtaining a $325,000 capital
infusion, which enabled it to continue its research and development activities,
and the perceived potential for shareholder value enhancement through possible
stock appreciation of Advance Technology common stock.
Because
American SXAN was not interested in continuing the infrared visions systems
business, Advance Technologies insisted that the stock of ISI be spun off so
that the existing shareholders of Advance Technologies and purchasers of their
stock would have the opportunity to benefit from any future success of such
business.
In
connection with the closing of the acquisition on July 10, 2007, the following
took place:
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Advance
Technologies issued to the stockholders of American SXAN 100,000 shares of
Series B Preferred Stock, which will be convertible into 17,647,058 shares
of common stock after the distribution of the ISI shares to which this
prospectus relates.
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The
Board of Directors of Advance Technologies elected members of the
management of Tieli XiaoXingAnling, specifically Feng Zhen Xing and Feng
Guo Wu, to serve as members of the Board of Advance
Technologies.
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The
prior members of the Board of Directors of Advance Technologies
resigned.
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Advance
Technologies sold 1,120,457 shares of its common stock (as adjusted for a
subsequent 1-for-51 reverse split) to Dr. Huakang Zhou for $325,000.
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Advance
Technologies assigned all of its pre-Merger business and assets (including
the $325,000 payment by Dr. Huakang Zhou) to ISI, and ISI assumed
responsibility for all of the liabilities of Advance Technologies that
existed prior to the Merger.
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Advance
Technologies entered into a management agreement with Gary Ball, its
previous CEO, and ISI. The management agreement provides that Mr.
Ball will manage ISI within his discretion, provided that his actions or
inactions do not threaten material injury to Advance Technologies.
The management agreement further provides that Mr. Ball will cause
ISI to file a registration statement with the Securities and Exchange
Commission that will, when declared effective, permit the distribution of
all of the outstanding shares of ISI to the holders of Advance
Technologies common stock, except that Dr. Huakang Zhou has agreed that he
will surrender to ISI any shares of ISI common stock that are distributed
to him in connection with the
distribution.
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In August
of 2007, Advance Technologies changed its name to China Sxan Biotech, Inc.
(CSBI) and effected a 1-for-51 reverse stock split of its common
stock. All references to shares of CSBI common stock in this
prospectus have been adjusted to reflect the reverse stock split.
In
November of 2007, CSBI issued an aggregate of 17,647,059 shares of CSBI common
stock to six investors in connection with the conversion by them of 100,000
shares of CSBI Series B Preferred Stock issued to them in July 2007 as part of
the share purchase and merger agreement. The six persons and the number of CSBI
common stock issued to each are as follows: Feng Zen Xing, 14,400,000 shares;
Feng Guo Wu, 800,000 shares; Yi Kang, 800,000 shares; Liu Jian Hua, 500,000
shares; American Union Securities, 600,000 shares; and Xiao Jin Wang, 547,000
shares. Such persons have executed agreements to surrender to ISI all
shares of ISI common stock that are distributed to them in connection with the
distribution.
The shares of ISI are owned by CSBI, who will distribute the ISI shares once the
Form S-1 registration statement is effective with the Securities and Exchange
Commission. The shares will be distributed by Pacific Stock Transfer Company,
which acts as our transfer agent.
Manner
of Completing the Spin-Off
The
record date for the distribution is December 22, 2008. Promptly after
the record date, we will split the number of shares of our outstanding common
stock, which are all held by CSBI, into the number of shares required for the
spin-off. The shares then will be delivered to the distribution
agent, Pacific Stock Transfer Company, for the distribution. As many as
20,073,346 shares of CSBI common stock may be outstanding on the record date if
all CSBI Series A Preferred Stock are converted by the record
date. However, 18,767,516 shares will be cancelled pursuant to
agreements with persons who received CSBI stock either in connection with the
acquisition of American SXAN by CSBI in 2007 or from CSBI subsequent to such
acquisition. As a result, the maximum number of ISI shares issued and
not cancelled pursuant to the distribution will be 1,305,830. After
the distribution, CSBI will not own any stock of ISI.
You will be entitled to receive our shares even if you sold your CSBI common
shares after the record date. A certificate representing your shares
of our common stock will be mailed by the distribution agent to your address of
record as of the record date. The mailing process is expected to take about
thirty (30) days.
No cash distributions will be paid. Fractional shares will be rounded to the
next whole share.
No
holder of common shares of CSBI is required to make any payment or exchange any
shares in order to receive our common shares in the spin-off
distribution.
Certain
Market Information
There
currently exists no public trading market for our common stock. We do not intend
to develop a public trading market until the spin-off has been completed. There
can be no assurance that a public trading market will develop at that time or be
sustained in the future. Without an active public trading market, you may not be
able to liquidate your shares without considerable delay, if at all. If a market
does develop, the price for our securities may be highly volatile and may bear
no relationship to our actual financial condition or results of operations.
Factors we discuss in this prospectus, including the many risks associated with
an investment in our company, may have a significant impact on the market price
of our common stock. Also, because of the relatively low price of our common
stock, many brokerage firms may not effect transactions in the common
stock.
Upon
effectiveness of this registration statement on Form S-1, we plan to apply for
quotation of the Common Stock on the OTC Bulletin Board operated by the
Financial Industry Regulatory Authority. ISI will have between approximately
1,152,279 and 1,305,830 shares of common stock issued and outstanding, depending
on the number of CSBI Series A Preferred Stock converted into CSBI common stock
on or before the record date for the spin-off.
ISI has
never paid a dividend on its common stock. We do not anticipate paying any
dividends on our common stock in the foreseeable future. Management anticipates
that earnings, if any, will be retained to fund our working capital needs and
the expansion of our business. The paying of any dividends is in the discretion
of the Board of Directors.
Following
the spin-off, we believe that there will be between approximately 1,015 and
1,126 stockholders of record (depending on the number of holders of record of
CSBI Series A Preferred Stock who convert such shares into CSBI common stock
prior to the record date).
Management’s
Discussion And Analysis Or Plan Of Operations
Disclaimer
Regarding Forward Looking Statements
This
prospectus includes forward-looking statements that include risks and
uncertainties. We use words such as “anticipates,” “believes,” “plans,”
“expects,” “future,” “intends” and similar expressions to identify such
forward-looking statements. This prospectus also contains forward-looking
statements attributed to certain third parties relating to their estimates
regarding the operation and growth of our business and spending. You should not
place undue reliance on these forward-looking statements, which apply only as of
the date of this prospectus. We have based these forward-looking statements on
our current expectations and projections about future events. Our
ability to generate revenue is subject to substantial risks. The following
discussion and analysis should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
Overview
We were
formed on April 11, 2006 to pursue the development of a proprietary infrared
security system. In July 2007, all assets and liabilities of Advance
Technologies, Inc. (AVTX) were transferred to us in connection with a merger
transaction involving AVTX.
Critical
Accounting Policies
We have identified the following
policies below as critical to our business and results of
operations. For further discussion on the application of these and
other accounting policies, see Note 1 to the accompanying audited financial
statements for the fiscal year ended September 30, 2007 and for the quarter
ended December 31, 2007, included elsewhere in this Prospectus.
Revenue
Recognition
Our
revenue primarily comes from royalties derived through licensing our technology
to a single customer, Kollsman. The licensing agreement with Kollsman
grants to Kollsman a worldwide, exclusive license under ISI proprietary data to
make, sell, maintain and repair products utilizing such data or patents for use
on any aircraft licensed to operate by the Federal Aviation Administration or by
equivalent foreign regulatory agencies. Royalty payments are required
for each Enhanced Vision System (EVS) unit sold utilizing a licensed product,
based upon the number of units sold. Pursuant to the license
agreement, the royalty is $800 per unit for units 201 through 2,000 (The first
20 units were prepaid in 1997; no payment was required for units 21 through 200,
all of which were sold prior to December 2004), $1,400 per unit for units 2,001
through 5,000, $3,800 per unit for units 5,001 through 10,000, and $200 per unit
thereafter. Pursuant to the license agreement, advance royalty
payments were made to ISI by Kollsman between 1997 and 1999 in an aggregate
amount of $105,000. As a result, as each of units 201 through 410
were sold, Kollsman was required to pay only $300 in cash per unit, and the
remaining $500 otherwise payable reduced the balance of the prior advance
royalty payments. For accounting purposes, the $105,000 in advance
royalty payments were deferred and recognized as the units were sold; therefore,
$800 per unit in revenues was recognized as each of units 201 through 410 was
sold. Through March 31, 2008, a total of 454 units had been sold. The
license continues until terminated by the mutual consent of the parties, or at
the
written
election of a party in the event of an uncured default by the other party, or by
us if Kollsman fails to sell an EVS system containing our licensed rights for 24
months. We recognize our royalty revenues as Kollsman sells aircraft
systems that include our technology. At that time, in accordance with
the license agreement, the royalty fee has been earned by us, there is an agreed
upon amount for the royalty fee, and collection of the royalty is reasonably
assured because the customer has timely made all payments required under the
license agreement since it was signed in July 1997.
We also
have generated some revenues from consulting arrangements where we have used our
technology to modify existing equipment. Consulting revenue is
recognized when the equipment has been modified, there is an agreed upon price
for the services, and collection of the revenue is reasonably
assured.
Plan
of Operation in the Next Twelve Months
We intend to continue to seek strategic
partners for our infrared security system over the coming
months. Such potential partners include infrared camera suppliers,
suppliers of radio frequency identification technology, commercial wireless
providers, and cellular handset suppliers.
We have
identified numerous potential applications for our infrared security system, and
will engage in discussions with various corporations in search of partners who
desire to utilize our system for one or more of the potential applications for
our system. The most likely potential applications for our system for
which we will seek partners include:
• small
to medium business security
• home
security
• construction
site security
• perimeter
security
• aircraft
security
• private
airport security
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•
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perimeter
security for key facilities such as refineries, power plants, water
reservoirs, and oil fields
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We
currently intend to focus primarily on uses of our infrared security system for
small to medium business security and home security.
We will
seek passive royalty-based license agreements of our
system. Consequently, we will not require manufacturing
facilities.
In
addition to our infrared security system, we hold, as the result of the transfer
of the assets and liabilities of AVTX, certain proprietary rights to infrared
products for various commercial applications, primarily relating to the EVS for
commercial aviation purposes. We may receive royalties from licenses
relating to certain of these rights. During 2007, all of our revenues
were generated from a single license.
The EVS
project continues with ongoing sales by Kollsman to Gulfstream. These
sales closely track the new aircraft deliveries by Gulfstream. The
retrofit market for Gulfstream continues at a slow rate, but is projected to
improve now that a modified form of the EVS,
designated
by Kollsman as the Enhanced Vision System II (EVS II), has been certified by the
FAA and is in production. The modification of the EVS system by
Kollsman did not involve us or our technology.
We
believe that the FAA certification of EVS II in late January of 2008 will result
in an increase in the Gulfstream retro-fit program for older models of their G
series aircraft, which will use the new EVS II, for FedEx.
Expenses
We estimate that we will require
between $35,000 and $55,000 over the next twelve months in order to implement
our business strategy, consisting primarily of:
• establishing
one or more development partnerships;
• building
a marketing demonstration model; and
• conducting
demonstrations and attending trade conventions.
Liquidity
and Capital Resources
Based upon our anticipated monthly
expenses of approximately $3,000 to $5,000 per month, exclusive of expenses
associated with this offering of approximately $70,000, we expect to have
sufficient capital resources to implement our business plan over the coming
year. This does not take into account royalties from the rights of
AVTX transferred to us in July 2007, which we believe will generate revenues of
at least $60,000 during the next twelve months as sales of EVS II units are
expected to increase. Our primary source of revenues is from
royalties from the EVS licensee, Kollsman.
Net sales
were approximately $65,600 for the fiscal year ended September 30, 2007 as
compared to approximately $73,600 for the prior fiscal year. The
decrease was due to a reduction in the number of EVS units sold by Kollsman from
92 in fiscal 2006 to 82 in fiscal 2007. Consulting fees decreased to
zero in fiscal 2007 compared to $6,215 for the prior fiscal
year. Such fees are generated by the periodic purchases by a foreign
customer, with our assistance, of infrared detectors from a third party for its
medical business, which purchases generally have occurred approximately every
other year. Since there were no costs of goods, gross profits were
the same as revenues. ISI earned $800 per unit during both fiscal
2006 and fiscal 2007. Of the revenues earned from the sale of EVS
units in fiscal 2007, $30,500 had been prepaid by Kollsman, as compared to
$46,000 that had been prepaid in fiscal 2006.
Selling,
General and Administrative Expenses
Operating
expense for the fiscal year ended September 30, 2007 was $82,418 as compared to
$84,212 for the prior fiscal year. Operating expenses remained
essentially flat with decreases in the patent attorney ($12,156) and executive
compensation ($24,479) offsetting a significant rise in professional fees from
$18,515 to $58,181. Executive compensation expenses
declined
primarily to the discontinuance of the executive compensation plan by the board
of directors. The increase in professional fees was due primarily to
approximately $23,000 in legal and accounting fees incurred in connection with
the spin-off of ISI, approximately $5,000 in legal fees incurred in connection
with the reverse merger of CSBI, and approximately $3,100 in accounting fees
incurred in connection with the change of accounting firms commencing with
fiscal 2006.
For the
fiscal year ended September 30, 2007, the expense was $14,392, compared to
$11,879 for the prior fiscal year. The increase in expense was for interest
expense as a result of a higher debt.
Net
Profit (Loss) Before Provisions for Income Taxes
The net
loss for the fiscal year ended September 30, 2007was $31,278 versus $16,276 for
prior fiscal year. The increase in the loss ($15,002) was primarily
due to the decrease in revenues of approximately $14,215 as a result of the
decline in units sold.
The
revenues for the three months ending March 31, 2008 were $4,800 as compared to
$16,000 in the quarter ending March 31, 2007. Revenues were $18,400
for the six months ended March 31, 2008, as compared to $33,600 for the six
months ended March 31, 2007. The decrease in revenues during both periods was
due to a reduction in EVS sales caused by the phasing out of EVS I to be
replaced by EVS II. A total of six EVS units were sold by Kollsman
during the three months ended March 31, 2008 as compared to 22 units in the
three months ended March 31, 2007, while a total of 23 EVS units were sold by
Kollsman during the six months ended March 31, 2008 as compared to 42 units in
the six months ended March 31, 2007.
The operating expenses for the three
months ended March 31, 2008 were $34,489 as compared to $30,505 for the three
months ended the March 31, 2007 period of $30,505. The slight
increase of $5,000 was due to an increase in general and administrative expenses
as a result of costs relating to the preparation of the registration statement
relating to the spin-off. Operating expenses were $73,537 for the six
months ended March 31, 2008, as compared to $36,981 for the six months ended
March 31, 2007. The increase of $36,556 was the result of
professional fees in connection with the preparation of the registration
statement. Professional fees for the six months ended March 31, 2008
were $56,000, as compared to $28,120 for the six months ended March 31,
2007. The increase was primarily due to legal and accounting fees in
connection with the preparation of the registration statement relating to the
spin-off. Other general and administrative expenses were $17,190 for
the six months ended March 31, 2008 as compared to $8,657 for the six months
ended March 31, 2007. This increase was due primarily to increased
travel, meals and entertainment expenses.
Interest expense for the three months
ended March 31, 2008 was $38, as compared to $2,423 for the three months ended
March 31, 2007, and was $43 for the six months ended March 31, 2008 as compared
to $4,107 for the six months ended March 31, 2007. Related party
interest expense was zero for the three months ended March 31, 2008, as compared
to $1,552 for the three months ended March 31, 2007, and was zero for the six
months ended March 31, 2008 as compared to $3,124 for the six months ended March
31, 2007. The decrease in interest expense and in related party
interest expense in both periods was due to the repayment of substantially all
of our debt in July 2007 with funds provided as a result of the transaction with
American SXAN Biotech, Inc.
Net
Profit (Loss) Before Provisions for Income Taxes
The net
loss for the three months ended March 31, 2008 was $29,727 as compared to
$18,480 for the three months ended March 31, 2007. The increase in
net loss was due to the reduced revenue from EVS sales. The net loss
for the six months ended March 31, 2008 was $55,112 as compared to a net loss
for the six months ended March 31, 2007 of $10,612. The increase in
net loss for the six month period was due primarily to the increase in
professional fees relating to the preparation of the registration statement, and
to the decrease in revenues from EVS sales.
Going
Concern
We have
limited working capital and limited revenues from sales of products or
licenses. During 2007, all of our revenues were generated from a
single licensee. These factors have caused our accountants to express
substantial doubt about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustment that might be
necessary if we are unable to continue as a going concern.
Our
ability to continue as a going concern is dependent on our attaining future
profitable operations. Management’s plans include strict restrictions on the
cost of ongoing operations, such as providing minimal compensation to
management, and limiting professional, travel and other operating expenses in
order to remain within our budget of approximately $35,000 to $55,000 per
year. Operating expenses were slightly more than $80,000 in each of
fiscal years 2006 and 2007, but such costs included professional and other
expenses related to merger and spin-off activities. There can be no
assurance we will be successful in these efforts.
Off
Balance Sheet Arrangements
There are
no off balance sheet arrangements.
Business
Background
Infrared
Systems International (ISI) was formed under the laws of the State of Nevada on
April 11, 2006 as a wholly owned subsidiary of CSBI (then known as Advance
Technologies, Inc.) to pursue a narrowly defined business objective called
infrared security systems.
On July
11, 2007, CSBI acquired American SXAN Biotech, Inc. a Delaware Corporation doing
business exclusively in the People’s Republic of China under a registered
capital corporation, Tieli XiaoXingAnling Forest Frog Breeding Co,
Ltd. As a result of the acquisition, the stockholders of
American SXAN Biotech, Inc. acquired control of CSBI.
Pursuant
to one of the terms of the acquisition, all of the assets and liabilities of
CSBI as of the date of the acquisition were transferred into
ISI. Since that time, ISI had conducted not only the infrared
security systems development for which it was formed but also the other prior
activities of CSBI.
ISI, and
prior to its formation in 2006 its parent, has been engaged in the development
of infrared products for commercial applications. Since 2006, ISI has focused
its activities on the development of infrared security systems for the automatic
detection of intruders. No other material products have been
developed by ISI (or prior to its formation its parent) for more than three
years, although ISI has various proprietary technology developed by its parent
prior to that time.
ISI’s
revenues during the past three years have been derived from only two sources: a
1997 license agreement relating to proprietary technology utilized by Kollsman
Instruments for its Enhanced Visions System for commercial aviation; and acting
on behalf of a Taiwanese company in connection with the purchase of infrared
detector systems in the U.S. from a third party, installing them in a camera
shell, and exporting the systems to the Taiwanese company. The
services rendered for the Taiwanese corporation are commercial labor and
transportation, and no technology of ISI is involved.
Enhanced
Vision System
We
previously were engaged in the development of an infrared imaging camera system
for commercial aircraft to allow civilian pilots to land their aircraft under
conditions of low or reduced visibility. The infrared camera system
is especially designed to enhance the performance of the imager by proprietary
techniques of selective wavelength enhancement. An exclusive license
for this system was granted to Kollsman Instruments in 1997. The licensing
agreement with Kollsman grants to Kollsman a worldwide, exclusive license under
ISI proprietary data to make, sell, maintain and repair products utilizing such
data for use on any aircraft licensed to operate by the Federal Aviation
Administration or by equivalent foreign regulatory agencies. Royalty
payments are required for each EVS system sold utilizing a licensed product,
based upon the number of units sold. . Pursuant to the license
agreement, the royalty is $800 per unit for units 201 through 2,000 (the first
20 units were prepaid and no payment was required for units 21 through 200),
$1,400 per unit for units 2,001 through 5,000, $3,800 per unit for units 5,001
through 10,000, and $200 per unit thereafter. Pursuant to
the
license
agreement, advance royalty payments were made to ISI by Kollsman during the
initial years of the license agreement, and were to be recouped through the
reduction of the royalty payments starting with unit 201 at the rate of $500 per
unit. As a result of such recoupment provision, we received only $300
per unit for units 201 through 410. Through March 31, 2008, a total
of 454 units had been sold. The license continues until terminated by
the mutual consent of the parties, or at the written election of a party in the
event of an uncured default by the other party, or by us if Kollsman fails to
sell an EVS system containing our licensed rights for 24 months.
The
royalties paid by Kollsman were $65,600 in the fiscal year ended September 30,
2007 and may be less in fiscal 2008 due to the phase-out of EVS I sales to be
replaced by EVS II sales. A total of 82 units were sold during fiscal
year 2007, of which approximately 55 units were subject to a reduction in actual
payment due to the recoupment of advance royalty payments. During the
first six months of the fiscal year ending September 30, 2008, a total of 23
units had been sold.
We have
an improved enhanced vision system product that is superior to the current
version licensed by Kollsman Instruments. However, we do not believe
that current conditions justify introducing this system to the air transport
market at this time. Pursuant to our agreement with Kollsman, it has
a right of first refusal for developments by us to the EVS
system. While we could launch a competitive product to Kollsman
without violating our agreement with it, we believe that the existing market for
these systems might not support additional competition. If market
factors change, we will re-examine this matter.
We
currently are not undertaking any new activities in the development of enhanced
visions systems.
Contracting
From time
to time, we (and before our formation our parent) have acted as an export agent
and service contractor for a Taiwanese corporation. That corporation,
among other things, has developed and markets a digital infrared medical
diagnosis system known as the SPECTRUM9000 System. We currently have
been engaged by the corporation to purchase 40 infrared detectors from a U.S.
supplier, install them into a camera shell provided by the corporation with a
test circuit board, and ship them in the camera shell to the corporation in
Taiwan. The Taiwanese corporation then removes the detectors for
installation in the NV-2000 IR camera which is part of the SPECTRUM9000
System. The detectors are installed by the Taiwanese corporation in a
clean room environment along with the other components, such as processing
circuitry, memory boards, power supply, cabling and optics). The
system conforms to the applicable directives and standards for medical thermal
imaging radiometer systems, and is registered with the U.S. Food and Drug
Adminstration. Since we do not participate in the assembly of the
SPECTRUM9000 System, we do not believe that our work on behalf of the Taiwanese
corporation requires us to register with the FDA as a manufacturer of medical
devices. The Taiwanese corporation is responsible for all compliance
issues with the FDA and the Taiwan government.
As part
of obtaining the detector systems for the Taiwanese corporation, we secure the
necessary export license from the U.S. Department of Commerce for the export of
the detector systems. This is the fourth time that we have performed
these services for the Taiwanese
corporation
since 2000. None of our proprietary technology is utilized in these
systems. Although the amount paid to us by the Taiwan corporation for
the current engagement was nearly $120,000, approximately $112,000 of this
amount is used to purchase the infrared camera detectors from a Dallas based
manufacturer. While our pre-tax profit after the cost of the detectors and the
other expenses incurred by us in connection with our services, but before
application of any overhead or general and administrative expenses, is expected
to be only approximately $3,000 to $4,000, the services require minimal effort
and no financial risk. Furthermore, there is the possibility that the
Taiwanese corporation may decide to sell the SPECTRUM9000 System in the U.S. and
may choose to use us in connection with such sales.
Infrared
Security System
The
infrared security system (ISS) product is based upon a unique concept that we
believe is proprietary. The ISS utilizes two or more infrared cameras directed
at a common surveillance area. The locations of the cameras and their
optical fields of view are pre-established and stored in a central computer
database. Computer programs harmonize the information into a three
dimensional grid, and camera processors perform image processing on the
surveillance area to detect moving objects. Information is
transmitted to the central computer, and compared to information in the database
for pre-defined threats. Alarm criteria can be based on object size,
location, and movement over time. We believe this system has a
powerful threat detection capability that inherently rejects false alarms and
which will separate our ISS from those of our competitors. A provisional
patent was filed in November 7, 2005 (60/597,048), a full patent was filed in
November 3, 2006, (11/592,639) preserving the original filing date, and a
petition for an expedited patent application review was filed in August
2007. In September 2007, our request for an accelerated review was
granted, and we expect the review to be completed sometime in
2008. We have no patents at this time.
The
proposed ISS patent is applicable to many different
applications. Each application has as a common feature (the ISS core
concept), but in many cases each application has unique features associated with
its particular market. These features, coupled with the basic patent
(if issued) are expected to lead to a series of supplemental patents on most
applications in order to extend and deepen the patent protection.
We
envision many different potential markets for the ISS, including small to medium
size businesses; construction sites; farms; refineries, power plants and other
important facilities; home security; aircraft security; private airport
security; and perimeter security around key locations. Our initial
priorities are businesses and home security.
We have
engaged in discussions with corporations that have a wide range of possible
interest in the ISS project. These discussions have led to the
formulation of an informal strategic technology team in which each team member
bears its own cost of participation and retains rights to its work product while
seeking to collaborate to meet a particular potential
market. There can be no assurance that such
discussions and collaborations will result in any actual business for
ISI. Even if any business materializes, ISI estimates that it would
be at least 9 to 12 months, if not longer, before ISI would receive any revenues
from such business.
Other
Activities
We previously entered into a
non-exclusive license agreement with a company pursuant to which we provided
technical know-how and development support to the company to develop an infrared
imaging system for recreational vehicles. At this time, we do not
anticipate any revenues from this agreement.
Competition
We are
engaged in two principal markets, enhanced vision systems for commercial
aviation and surveillance systems for physical security. There are
numerous companies providing such services in the United States and in other
countries. Our competitors have greater financial resources and more expertise
in this business. Our ability to develop our business will depend on our ability
to successfully market our products in this highly competitive environment. We
cannot guarantee that we will be able to do so successfully.
In the
enhanced vision systems market, we have an exclusive agreement with Kollsman
Inc. whereby our intellectual property and information was used to create an
enhanced vision system being produced and marketed by Kollsman. We
believe that the principal competitors of Kollsman are CMC Marconi and
Max-Viz. Both corporations have announced that they have developed an
enhanced vision system similar to that of Kollsman, but to our knowledge neither
of these products have been certified by the FAA to operate in the low
visibility conditions for which the Kollsman enhanced vision system is
approved.
The
market for infrared surveillance is extremely competitive. We believe that
competition in these areas is principally based on the quality of the product in
terms of performance, reliability, service, deliverability, and
price. The demand for infrared sensing devices has produced a wide
variety of competitors and competitive systems. For most commercial
applications, the principal competitive factor is cost, although we believe that
for the applications we seek to pursue the principal competitive factor will be
performance.
Effect
of Governmental Regulations
Infrared
imaging has been given a commodity jurisdiction by the US Department of State.
As a controlled “dual use” technology, the “dual use” being military and
commercial, the technology is subject to US government oversight. In
certain defined instances our “commercial product” could be applied and used in
a non-commercial application, such as military or US government agency
applications. In such a case, our commercial product would be
monitored and controlled by the US Arms Export Control Act, and the technical
data must be in compliance with the Internal Traffic in Arms
Regulation. We do not expect such government regulation to materially
impede our proposed business.
Although the EVS system incorporating
our proprietary technology required FAA approval, such approval was the
obligation of Gulfstream. The export by us of infrared detectors
purchased in the U.S. to our Taiwanese customer requires an export license from
the U.S. Department of Commerce, which we have obtained. We believe
that our activities on behalf of the Taiwanese customer, since we are not
involved in manufacturing a medical device, do not require FDA
approval.
Property
We
currently use the address of our President for company use, for which we pay him
$400 per month. We currently do not plan to occupy separate office facilities or
obtain office furniture and equipment after the spin-off. We own no real estate
nor have plans to acquire any real estate.
Employees
We
have no employees other than Gary Ball, our President and Secretary-Treasurer.
Mr. Ball does not have a written employment agreement with us.
Legal
Proceedings
We
are not a party to any material legal proceedings, nor is our property the
subject of any material legal proceeding.
Management
Directors,
executive officers and key employees
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Name:
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Age
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Position:
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Gary
E. Ball
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70
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President,
Chief Executive Officer,
Chief
Financial Officer, Secretary-Treasurer and Director
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Gary
L. Bane
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70
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Director
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James
R. Watson
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60
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Director
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Gary E.
Ball has been ISI’s Chief Executive Officer,
President, Secretary-Treasurer, and a director since its formation in April
2006. For more than five years until the closing of the merger in July 2007, Mr.
Ball was CEO, President and a director of CSBI. Prior thereto, Mr. Ball
specialized in product design, development, and management for North American
Aviation; was a Technical Manager for the Pave Tack program for Ford Aerospace;
was Program Manager for Northrop Electro-Mechanical in charge of business
development on several classified Department of Defense programs; was Program
Manager for Hughes Aircraft, where he developed their infrared enhanced vision
system; and was a member of the NATO NIAG study group on aircraft integration.
Mr. Ball has authored several articles for trade publications, and for the last
9 years he has provided consulting services to 10 U.S. and foreign corporations
in the field of infrared technology. Mr. Ball attended California State
University at Long Beach, where he graduated with a BSEE and MSEE, and later
took graduate studies at the University of Southern California.
Gary L.
Bane has been a director of ISI since its formation in April 2006, and
was a director of CSBI at the time of the closing of the merger in July
2007. Mr. Bane has been employed as an independent consultant for
more than the last five years.
James R. Watson
has been a director of ISI since its formation in April 2006, and was a
director of CSBI at the time of the closing of the merger in July
2007. Mr. Watson is a sales, marketing and general management
executive with over twenty-five years of experience in managing a wider range of
marketing, sales and operations functions designed to create or expand domestic
and international sales opportunities. Since 2001, he has been the
Vice President of Operations for California Manufacturing Technology Consulting
in Gardena, California, where he is responsible for marketing, sales, consulting
services, and the development of delivery tools and services. Prior
thereto, his duties have included establishing aerospace and defense and
distribution industry teams. Mr. Watson also has served as a Vice
President of Sales and General Manager, Europe, for Anchor Audio, Inc. in Los
Angeles, California, where he was responsible for domestic sales planning, field
sales, and government and OEM sales, and Vice President – Passenger & Cargo
Sales for Western Airlines, where he was responsible for managing over 1,100
people in sales programs, field sales, reservations and advertising, with a
budget in excess of $150 million.
Director
Independence
Our board
of directors consists of Gary E. Ball, Gary L. Bane, and James Watson. Messrs.
Bane and Watson each is an “independent director” as such term is defined in
Section 4200(a)(15) of the NASDAQ Marketplace Rules.
Committees
of the Board of Directors
Currently,
we do not have any committees of the Board of Directors, and none are planned at
this time.
Director
and Executive Compensation
At
the present time, we do not pay any compensation to our directors and officers,
although we reimburse them for reasonable expenses incurred on our
behalf. We anticipate that we will begin to compensate our directors
and officers at some time in the future, but as of the date of this prospectus
we have no specific plans for such compensation.
Employment
Agreements
We
do not have a written employment agreement with Gary E. Ball, our sole executive
officer.
Equity
Incentive Plan
We
have not adopted an equity incentive plan, and no stock options or similar
instruments have been granted to any of our officers or directors.
Indemnification
and Limitation on Liability of Directors
Our
Articles of Incorporation eliminate the liability of our directors for monetary
damages to the fullest extent permissible under Nevada law. Under the
Nevada Revised Statutes, director immunity from liability to a company or its
stockholders for monetary liabilities applies automatically unless it is
specifically limited by a company's Articles of Incorporation. Excepted from
that immunity are: (a) a willful failure to deal fairly with the company or its
stockholders in connection with a matter in which the director has a material
conflict of interest; (b) a violation of criminal law, unless the director had
reasonable cause to believe that his or her conduct was lawful or no reasonable
cause to believe that his or her conduct was unlawful; (c) a transaction from
which the director derived an improper personal profit; and (d) willful
misconduct.
Our
bylaws provide that we will indemnify our directors and officers to the fullest
extent not prohibited by Nevada law; provided, however, that we may modify the
extent of such indemnification by individual contracts with our directors and
officers; and, provided, further, that we shall not be required to indemnify any
director or officer in connection with any proceeding, or part thereof,
initiated by such person unless such indemnification: (a) is expressly required
to be made by law, (b) the proceeding was authorized by our board of directors,
(c) is provided by us, in our sole discretion, pursuant to the powers vested in
us under Nevada law or (d) is required to be made pursuant to the
bylaws.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
Certain
Relationships and Related Transactions
We
utilize office space and storage provided by Gary E. Ball, for which we pay Mr.
Ball $400 per month. We also pay Mr. Ball $350 per month as a car
allowance. Both payments are made pursuant to authorization by the
Board of Directors but without a written agreement.
During
the years ended September 30, 2007 and 2006, respectively, Gary E. Ball loaned
combined amounts of $4,800 and $8,350 to us and our parent, and we and our
parent combined repaid loans totaling $82,550 and $1,600. At
September 30, 2007 and 2006, we and our parent combined owed a total of $0 and
$77,750 to Mr. Ball. The loans did not bear interest and were due on
demand; however, we and our parent imputed interest at an annual rate of
8%. During the years ended September 30, 2007 and 2006, respectively,
we and our parent imputed combined interest expense of $4,887 and
$6,030. Mr. Ball has not loaned any sums to us since September 30,
2007.
In April
2006, we issued 6,000,000 shares of our common stock to our parent for services
valued at $2,000 and for cash of $1,000. In July 2007, our parent
made cash contributions to us totaling $293,463.
During
the year ended September 30, 2006, our parent issued its preferred stock to its
directors to pay a liability of $8,000 and for services valued at $44,039 (of
which the directors provided $32,629).
Pursuant to the Assignment and
Assumption and Management Agreement entered into by CSBI, ISI, and Gary E. Ball
dated July 10, 2007, ISI has engaged Mr. Ball to manage and operate its
business. Such agreement provides that the Board of Directors of ISI
shall consist, prior to the spin-off, of Mr. Ball, Mr. Bane, and Mr. Watson, and
that Mr. Ball shall serve as the sole officer of ISI. Mr. Ball is
responsible for managing and operating the business of ISI prior to the
spin-off.
The Taiwanese corporation for whom we
currently are conducting services also has engaged Mr. Ball to provide personal
assistance to it. Mr. Ball does not expect the fees for such
assistance to be more than a few thousand dollars.
Immediately after the spin-off, Mr.
Ball and his wife will be the largest single owners of our common stock, owning
in the aggregate between approximately 22% and 35% of the outstanding
stock, depending on the number of shares of CSBI Series A Preferred Stock that
are converted into CSBI common stock on or prior to the record date for the
distribution.
Principal
Stockholders
The
following table sets forth, as of June 2, 2008, information regarding the
anticipated future ownership of our common stock immediately after the spin-off
by:
|
|
•
|
persons
who own more than 5% of our common stock;
|
|
|
•
|
each
of our directors and each of our executive officers;
and
|
|
|
•
|
all
directors and executive officers as a
group.
|
Each
person will have sole voting and investment power with respect to the shares
shown, except as noted. The table assumes that all shares of CSBI
Series A Preferred Stock are converted into CSBI common stock prior to the
record date for the spin-off.
|
|
No.
of
|
Percentage
|
No.
of
|
Percentage
|
|
Name
of
Beneficial
Owner
|
Common
Shares
Before
Stock Cancellation(1)
|
of Ownership Prior
to Stock Cancellation
(2)(3)
|
Common
Shares
After
Stock Cancellation(4)
|
of Ownership After
Stock Cancellation
(2)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
E. Ball and Wendy Ball (6)(7)
|
338,780
|
1.7%
|
338,780
|
25.9%
|
|
|
|
|
|
|
|
Gary
L. Bane (6)
|
19,653
|
*
|
19,653
|
1.5%
|
|
|
|
|
|
|
|
James
R. Watson (6)
|
1,532
|
*
|
1,532
|
0.1%
|
|
|
|
|
|
|
|
All
Officers and Directors as a Group (3 persons) (7)
|
359,965
|
1.8%
|
359,965
|
27.5%
|
|
|
|
|
|
|
|
Huakang
Zhou (8)
|
1,120,457
|
5.6%
|
0
|
0%
|
|
|
|
|
|
|
|
Feng
Zhen Xing (9)
|
14,400,000
|
71.7%
|
0
|
0%
|
|
|
|
|
|
|
* Less
than one percent.
(1) Certain
stockholders of CSBI have agreed to have their ISI shares cancelled when the
spin-off is effected. See “The Spin-Off and Plan of Distribution –
Background and Reasons for the Spin-Off.” This column sets forth the
number of shares to be owned by all indicated persons prior to such
cancellation.
(2) All
ownership is beneficial and of record, and all beneficial owners listed above
have sole voting and investment power with respect to the shares shown, unless
otherwise indicated.
(3) Assumes
that all outstanding shares of CSBI Series A Preferred Stock are converted into
CSBI common stock prior to the record date for the distribution of our common
stock.
(4) This
column sets forth the number of shares to be owned by all indicated persons
after an aggregate of 18,767,516 shares otherwise issuable in
connection with the spin-off are cancelled. See “The Spin-Off and Plan of
Distribution – Background and Reasons for the Spin-Off.”
(5) Based
on an aggregate of 1,305,830 shares outstanding after the cancellation of stock
referred to in footnote (4) and assuming that all Series A Preferred Stock of
CSBI are converted into CSBI common stock prior to the record date for the
spin-off.
(6) The
business address for such persons is c/o Infrared Systems International, 15 N.
Longspur Drive, The Woodlands, TX 77380.
(7) The
shares indicated include 50,904 shares that will be held in the IRA of Wendy
Ball, the spouse of Gary E. Ball.
(8) The
business address of such person is c/o Warner Technology & Investment Corp.,
701 East Linden Avenue, Linden, N.J. 07036.
(9) The
business address of such person is c/o Tieli XiaoXingAnLing Forest Frog Breeding
Co., Ltd., Three-Kilometer Spot Along the Hayi Highway, Tieli City, Heilongjiang
Province, P.R. China
Federal
Income Tax Considerations
General
The
following discussion summarizes the material U.S. federal income tax
consequences of the spin-off transactions to CSBI stockholders who hold CSBI
common stock as a capital asset. This discussion is based upon the U.S. federal
income tax laws and regulations now in effect and as currently interpreted by
courts or the Internal Revenue Service and does not take into account possible
changes in such tax laws or such interpretations, any of which may be applied
retroactively. The discussion herein is not binding upon, nor considered
authority by, the IRS or any court or state taxing authority, and no assurance
can be provided that the tax treatment of the spin-off, as reported by CSBI,
will not be challenged by the IRS or any state taxing authority.
This
summary is not intended as a complete description of all tax consequences of the
spin-off, and in particular may not address U.S. federal income tax
considerations applicable to CSBI stockholders who are subject to special
treatment under U.S. federal income tax law. Stockholders subject to special
treatment include, for example:
|
|
•
|
foreign
persons (for income tax purposes, a non-U.S. person includes a person who
is not a citizen or a resident of the United States, or an alien
individual who is a lawful permanent resident of the United States, or
meets the substantial presence residency test under the federal income tax
laws, or a corporation, partnership or other entity that is not organized
in or under the laws of the United States or any state thereof or the
District of Columbia);
|
|
|
|
|
|
|
•
|
financial
institutions;
|
|
|
|
|
|
|
•
|
dealers
in securities;
|
|
|
|
|
|
|
•
|
traders
in securities who elect to apply a mark-to-market method of
accounting;
|
|
|
|
|
|
|
•
|
insurance
companies;
|
|
|
|
|
|
|
•
|
tax-exempt
entities employee benefit plans, IRAs, Keogh plans or other arrangements
subject to the Employee Retirement Income Security Act of 1974, as
amended, or the Code;
|
|
|
|
|
|
|
•
|
holders
who acquire their shares pursuant to the exercise of employee stock
options or other compensatory rights or as a result of conversion of CSBI
Series A Preferred Stock into CSBI common stock prior to the record date
of the distribution; and
|
|
|
|
|
|
|
•
|
holders
who hold CSBI common stock as part of a hedge, straddle,
conversion, constructive sale or similar
transaction.
|
Further,
no information is provided in this prospectus with respect to the tax
consequences of the spin-off under applicable foreign or state or local laws.
State and foreign tax laws are often substantially different from U.S. federal
income tax laws with respect to the treatment, calculation and timing of
recognition of specific tax items.
CSBI stockholders are urged to
consult with their tax advisors regarding the tax consequences of the spin-off
to them, as applicable, including the effects of U.S. federal, state, local,
foreign and other tax laws.
We
believe that the distribution will not qualify as a tax-free distribution
because we do not believe it meets the requirements of Section 355 of the
Code.
Based
upon the assumption that the spin-off fails to qualify as a tax-free
distribution under Section 355 of the Code, then each CSBI stockholder receiving
our shares of common stock in the spin-off generally would be treated as if such
stockholder received a taxable distribution in an amount equal to the fair
market value of our common stock when received. This would result
in:
|
|
•
|
a
dividend to the extent paid out of (1) CSBI's current earnings
and profits for the tax year in which the spin-off occurs and
(2) CSBI’S accumulated earnings and profits at the end of the year in
which the spin-off occurs; then
|
|
|
|
|
|
|
•
|
a
reduction in the shareholder’s income tax basis in CSBI common stock to
the extent that the fair market value of our common stock received in the
spin-off exceeds the shareholder’s dividend portion of the distribution
referenced above; and then
|
|
|
|
|
|
|
•
|
gain
from the sale or exchange of CSBI common stock to the extent the value of
our common stock received by that shareholder exceeds the sum of the
portion taxed as a dividend and the portion treated as a reduction in
basis.
|
|
|
|
|
|
|
•
|
each
stockholder's basis in our common stock should equal the fair market value
of such stock at the time of the spin-off. If a public trading market for
our common stock develops, we believe that the fair market value of the
shares will be equal to the public trading price of the shares on the
distribution date. However, if a public trading market for our shares does
not exist on the distribution date, other criteria will be used to
determine fair market value, including such factors as recent transactions
in our shares, our net book value and other recognized criteria of
value.
|
CSBI is
taxable as a corporation. As a result: (i) CSBI would be subject to
federal and state income tax on its taxable income at corporate income tax
rates, without a deduction for any distributions to CSBI stockholders as a
result of receiving our shares of common stock in the spin-off; (ii) CSBI would
recognize taxable gain to the extent the fair market value of our shares it
distributes exceeds CSBI’s income tax basis in those shares; and (iii) CSBI
stockholders receiving our shares of common stock in the spin-off would be
required to treat the receipt of our stock as items of dividend, return of
capital or gain.
Following
completion of the spin-off, information with respect to the allocation of the
amount distributed among the various categories described above will be made
available to the holders of CSBI common stock.
Federal
Securities Laws Consequences
All
of the shares of ISI common stock distributed to CSBI stockholders in the
spin-off will be freely transferable under the Securities Act, except for those
securities received by persons who may be deemed to be affiliates of ISI under
Securities Act rules. Persons who may be deemed to be affiliates of ISI after
the spin-off generally include individuals or entities that control, are
controlled by or are under common control with ISI, such as our directors and
executive officers. Approximately 359,963 shares of our common stock will be
held by affiliates after completion of the spin-off.
Persons
who are affiliates of ISI generally will be permitted to sell their shares of
ISI common stock received in the spin-off only pursuant to Rule 144 under the
Securities Act. As a result, ISI common stock received by ISI
affiliates pursuant to the spin-off may be sold after the required six-month
holding period if the provisions of Rule 144 relating to current public
information, volume limitations, manner of sale requirements, and filing of a
Form 144 are complied with.
Description
of Securities
We are authorized
to issue up to 50,000,000 shares of $0.001 par value common stock and 50,000,000
shares of $0.001 par value preferred stock. As of June 2, 2008,
6,000,000 shares of common stock and no shares of preferred stock were issued
and outstanding. All of the outstanding shares of common stock as of such date
were held by CSBI and will be distributed pursuant to the
spin-off. Following the spin-off, we believe that there will be
approximately 1,015 to 1,126 stockholders of record, based upon the number of
record holders of CSBI common shares as of the record date for the distribution
and the number of holders of shares of CSBI Series A Preferred Stock who convert
such CSBI Series A Preferred Stock into CSBI common stock prior to the record
date. All of our common shares distributed in the spin-off will be duly
authorized, fully paid and nonassessable. The shares of ISI common stock are
owned by CSBI, who will distribute the ISI shares once the registration
statement on Form S-1 is effective with the Securities and Exchange Commission.
The shares will be distributed by Pacific Stock Transfer Corp., which acts as
our transfer agent.
Common
Stock
The
holders of common stock are entitled to one vote for each share held. The
affirmative vote of a majority of votes cast at a meeting that commences with a
lawful quorum is sufficient for approval of most matters upon which
stockholders may or must vote, including the questions presented for approval or
ratification at the Annual Meeting. Common shares do not carry cumulative
voting rights, and holders of more than 50% of the common stock have the power
to elect all directors and, as a practical matter, to control the company.
Holders of common stock are not entitled to preemptive rights, and the common
stock may only be redeemed at our election.
Preferred
Stock
We
are authorized to issue up to 50,000,000 shares of $0.001 par value preferred
stock. Our preferred shares are entitled to such rights, references and
limitations as determined by our board of directors. At the present time, no
rights, preferences or limitations have been established for our preferred
shares.
Although
we currently do not have any plans to issue shares of preferred stock or to
designate any series of preferred stock, there can be no assurance that we will
not do so in the future. As a result, we could authorize the issuance of a
series of preferred stock which would grant to holders preferred rights to our
assets upon liquidation, the right to receive dividend coupons before dividends
would be declared to common stockholders, and the right to the redemption of
such shares, together with a premium, prior to the redemption to common stock.
Our common stockholders have no redemption rights. In addition, our Board could
issue large blocks of voting stock to fend off unwanted tender offers or hostile
takeovers without further stockholder approval.
Warrants
and Options
We
have not issued any warrants, options or other derivative
securities.
Transfer
Agent
The
stock transfer agent for our securities is Pacific Stock Transfer Company. Their
address is 500 E. Warm Springs Road, Suite 240, Las Vegas, Nevada 89119, and
their phone number is (702) 361-3033.
Reports
to Stockholders
We
intend to furnish annual reports to stockholders which will include audited
financial statements reported on by our independent certified public
accountants. In addition, we will issue unaudited quarterly or other interim
reports to stockholders as we deem appropriate.
Legal
Matters
Edward
T. Swanson, Esq. of Santa Monica, California has passed upon the validity of the
shares being offered hereby and certain other legal matters and is representing
us in connection with this offering.
Experts
The
financial statements of ISI as of and for the year ended September 30, 2007
included herein and elsewhere in the Registration Statement have been audited by
Child, Van Wagoner & Bradshaw, PLLC, independent certified public
accountants, to the extent set forth in their report appearing herein and
elsewhere in the Registration Statement. Such financial statements have been so
included in reliance upon the report of such firm given upon their authority as
experts in auditing and accounting.
Where
You Can Find More Information
You
may read and copy any document we file at the Commission's Public Reference Room
in Washington, D.C. The Public Reference Room is located in Room 1580, 100 F
Street N.E., Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on the Public Reference Rooms. You can
also obtain copies of our Commission filings by going to the Commission's
website at http://www.sec.gov.
We
have filed with the Commission a Registration Statement on Form S-1 to register
the shares of our common stock to be distributed in the spin-off. This
prospectus is part of that Registration Statement and, as permitted by the
Commission's rules, does not contain all of the information set forth in the
Registration Statement. For further information about our company or our common
stock, you may refer to the Registration Statement and to the exhibits filed as
part of the Registration Statement.
We
are not currently subject to the informational filing requirements of the
Exchange Act. However, as a result of this offering, we will become subject to
these requirements and will file periodic reports, including annual reports
containing audited financial statements, reports containing unaudited interim
financial statements, quarterly and special reports, proxy statements and other
information with the Commission. We will provide without charge, to each person
who receives this prospectus, copies of our reports and other information which
we file with the Commission. Your request for this information should be
directed to our President and Chief Financial Officer, Mr. Gary E. Ball, at our
corporate office in The Woodlands, Texas. You can also review this information
at the public reference rooms of the Commission and on the Commission's website
as described above.
Infrared
Systems International
INDEX
TO FINANCIAL STATEMENTS
ANNUAL
FINANCIAL STATEMENTS
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Statements
of Operations, For the Years Ended
|
F-4
|
|
Statements
of Stockholders' Equity (Deficit), For the Years Ended
|
F-5
|
|
Statements
of Cash Flows, For the Years Ended
|
F-6
|
|
Notes
to the Financial Statements
|
F-7
|
QUARTERLY
FINANCIAL STATEMENTS
|
Unaudited
Condensed Statements of Operations, For the Three and Six Months
Ended
|
F-16
|
|
Unaudited
Condensed Statements of Cash Flows, For the Six Months
Ended
|
F-17
|
|
Notes
to the Unaudited Condensed Financial Statements
|
F-18
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors and Stockholders of
Infrared
Systems International
We have
audited the accompanying balance sheets of Infrared Systems International (the
“Company”) as of September 30, 2007 and 2006, and the related statements of
operations, stockholders’ deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Infrared Systems International as
of September 30, 2007 and 2006, and the results of its operations, changes in
stockholders’ deficit and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred losses from operations, has a
liquidity problem, and requires funds for its operational activities. These
factors raise substantial doubt that the Company will be able to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Since our
previous report dated January 21, 2008, as described in Note 2, the Company
discovered a material error in its presentation of its financial
statements. However, the Company has restated the financial
statements to reflect the correction of this error.
1284 W.
Flint Meadow Dr. #D
Telephone
801.927.1377
Facsimile
801.927.1344
5296 S.
Commerce Dr. #300
Telephone
801.281.4700
Facsimile
801.281.4701
Suite B,
4F
North
Cape Commercial Bldg.
388
King’s Road
North
Point, Hong Kong
Certified
Public Accountants
Salt Lake
City, Utah
|
INFRARED
SYSTEMS INTERNATIONAL
|
|
BALANCE
SHEETS
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
CURRENT
ASSETS:
|
|
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
Cash
|
|
|
$
|
118,904
|
|
$
|
4,200
|
|
|
|
Accounts
receivable
|
|
|
|
17,400
|
|
|
5,700
|
|
|
|
Prepaid
expenses
|
|
|
|
2,406
|
|
|
72
|
|
|
|
|
Total
Current Assets
|
|
138,710
|
|
|
9,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
|
1,438
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFINITE-LIFE
INTANGIBLE ASSETS
|
|
|
16,765
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
$
|
156,913
|
|
$
|
13,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
14,788
|
|
$
|
|
30,457
|
|
|
|
Unearned
revenues
|
|
|
|
-
|
|
|
|
30,500
|
|
|
|
Related
party loans
|
|
|
|
-
|
|
|
|
77,750
|
|
|
|
|
Total
Current Liabilities
|
|
14,788
|
|
|
|
138,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAX LIABILITY
|
|
|
68
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
14,856
|
|
|
|
138,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 50,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized,
no shares issued and outstanding
|
|
-
|
|
|
|
-
|
|
|
Common
stock, $0.001 par value, 50,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized,
6,000,000 shares issued and outstanding
|
|
6,000
|
|
|
|
6,000
|
|
|
Capital
in excess of par value
|
|
|
998,619
|
|
|
|
700,269
|
|
|
Retained
earnings (deficit)
|
|
(
|
862,562
|
)
|
(
|
|
831,284
|
)
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
142,057
|
|
(
|
|
125,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS'
EQUITY
(DEFICIT)
|
$
|
156,913
|
|
$
|
|
13,692
|
|
|
See
accompanying notes.
|
|
INFRARED
SYSTEMS INTERNATIONAL
|
|
STATEMENTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
REVENUES:
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
Royalty
|
|
|
$
|
65,600
|
|
|
$
|
73,600
|
|
|
|
Consulting
|
|
|
|
-
|
|
|
|
6,215
|
|
|
|
|
Total
Revenue
|
|
65,600
|
|
|
|
79,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
|
-
|
|
|
|
24,479
|
|
|
|
Consulting
|
|
|
|
394
|
|
|
|
12,550
|
|
|
|
Professional
fees
|
|
|
|
58,181
|
|
|
|
18,515
|
|
|
|
Other
general and administrative
|
|
23,843
|
|
|
|
28,668
|
|
|
|
Total
Operating Expenses
|
|
82,418
|
|
|
|
84,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
(
|
16,818
|
)
|
|
(
|
4,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(
|
9,505
|
)
|
|
(
|
5,849
|
)
|
|
|
Related
party interest expense
|
|
(
|
4,887
|
)
|
|
(
|
6,030
|
)
|
|
|
Total
Other Income (Expense)
|
(
|
14,392
|
)
|
|
(
|
11,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAX PROVISION
|
(
|
31,210
|
)
|
|
(
|
16,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
(
|
68
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
$(
|
31,278
|
)
|
|
$(
|
16,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED LOSS PER SHARE
|
$(
|
0.01
|
)
|
|
$(
|
0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
6,000,000
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
INFRARED
SYSTEMS INTERNATIONAL
|
|
|
STATEMENTS
OF STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
in
|
|
Retained
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
Excess
of
|
|
Earnings
|
|
|
|
|
|
Shares
|
|
Amount
|
Shares
|
|
Amount
|
Par Value
|
|
(Deficit)
|
|
|
|
|
|
-
|
$
|
-
|
-
|
$
|
-
|
$
|
645,200
|
|
$(
|
815,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
common stock to Parent for cash of $1,000 and for services valued at
$2,000, April 2006
|
-
|
|
-
|
6,000,000
|
|
6,000
|
(
|
3,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
issued its preferred stock to pay a liability of $8,000 and for services
valued at a total of $44,039
|
-
|
|
-
|
-
|
|
-
|
|
52,039
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Imputed
related party interest
|
-
|
|
-
|
-
|
|
-
|
|
6,030
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
-
|
-
|
|
-
|
|
-
|
|
(
|
16,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
-
|
6,000,000
|
|
6,000
|
|
700,269
|
|
(
|
831,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contributions, July 2007
|
-
|
|
-
|
-
|
|
-
|
|
293,463
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Imputed
related party interest
|
-
|
|
-
|
-
|
|
-
|
|
4,887
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
-
|
-
|
|
-
|
|
-
|
|
(
|
31,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
$
|
-
|
6,000,000
|
$
|
6,000
|
$
|
998,619
|
|
$(
|
862,562
|
)
|
|
|
|
|
See
accompanying notes.
|
|
|
INFRARED
SYSTEMS INTERNATIONAL
|
|
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
Net
income (loss)
|
|
|
|
|
$(
|
31,278
|
)
|
|
$(
|
16,276
|
)
|
|
|
Adjustments
to reconcile net income (loss) to
|
|
|
|
|
|
|
|
|
|
|
|
|
net
cash used by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
215
|
|
|
|
884
|
|
|
|
|
Imputed
interest
|
|
|
|
|
|
4,887
|
|
|
|
6,030
|
|
|
|
|
Stock
issued for services
|
|
|
|
|
-
|
|
|
|
44,039
|
|
|
|
|
Net
(increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
(
|
11,700
|
)
|
|
|
900
|
|
|
|
|
|
Prepaid
expenses
|
|
|
|
(
|
2,334
|
)
|
|
(
|
72
|
)
|
|
|
|
Net
increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
(
|
15,669
|
)
|
|
|
8,764
|
|
|
|
|
|
Unearned
revenues
|
|
|
|
(
|
30,500
|
)
|
|
(
|
46,000
|
)
|
|
|
|
|
Deferred
income tax liability
|
|
|
|
|
68
|
|
|
|
-
|
|
|
Net
Cash Used by Operating Activities
|
(
|
86,311
|
)
|
|
(
|
1,731
|
)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
|
(
|
933
|
)
|
|
(
|
753
|
)
|
|
|
Payments
for definite-life intangible assets
|
|
|
(
|
13,765
|
)
|
|
(
|
3,000
|
)
|
|
Net
Cash Used by Investing Activities
|
(
|
14,698
|
)
|
|
(
|
3,753
|
)
|
|
CASH
FLOWS FROM FINANCING ACTIVITES:
|
|
|
|
|
|
|
|
|
|
|
Payment
on related party loans
|
|
|
|
(
|
82,550
|
)
|
|
(
|
1,600
|
)
|
|
|
Proceeds
from related party loans
|
|
|
|
|
4,800
|
|
|
|
8,350
|
|
|
|
Proceeds
from capital contributions
|
|
|
|
|
293,463
|
|
|
|
-
|
|
|
Net
Cash Provided by Financing Activities
|
|
215,713
|
|
|
|
6,750
|
|
|
NET
INCREASE IN CASH
|
|
|
|
|
|
114,704
|
|
|
|
1,266
|
|
|
CASH
AT BEGINNING OF YEAR
|
|
|
|
|
4,200
|
|
|
|
2,934
|
|
|
CASH
AT END OF YEAR
|
|
|
|
|
$
|
118,904
|
|
|
$
|
4,200
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
$
|
9,505
|
|
|
$
|
5,849
|
|
|
|
|
Income
taxes
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NON CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE FINANCIAL STATEMENTS
NOTE 1 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Infrared
Systems International (“the Company”) is a corporation organized under the laws
of the State of Nevada on April 11, 2006 as a wholly-owned subsidiary of China
SXAN Biotech, Inc. (formerly Advance Technologies, Inc.) (“Parent”). Parent was
organized under the laws of the State of Delaware on June 16, 1969. In July
2007, Parent transferred the assets, liabilities, and operations of its
technology licensing business to the Company. Because Parent’s operations are
considered to be the Company’s predecessor business, the financial statements
include Parent’s operations from the inception of the business. The Company is
in the process of effecting its spin-off by dividend to stockholders of
Parent.
Nature of
Operations - The Company licenses rights to use internally-developed optical
technology. The Company also plans to develop a night vision system with
applications for both military and civil aircraft. The Company has not paid any
dividends and any dividends that may be paid in the future will depend upon the
financial requirements of the Company and other relevant factors.
Use of
Estimates - The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash and
Cash Equivalents - The Company considers all highly-liquid debt investments
purchased with a maturity of three months or less to be cash
equivalents.
Accounts
Receivable - The Company records accounts receivable at cost less allowance for
doubtful accounts. Since all accounts receivable are from one licensee,
Kollsman, Inc., which has timely paid all royalties to the Company, management
has estimated that no allowance for doubtful accounts is necessary. The Company
estimates allowances for doubtful accounts based on the aged receivable balances
and historical losses.
Property
and Equipment – The Company records property and equipment at cost and uses
straight-line depreciation methods. Maintenance, repairs, and expenditures for
renewals and betterments not determined to extend the useful lives or to
materially increase the productivity of the assets are expensed as incurred.
Other renewals and betterments are capitalized.
Unearned
Revenues – The Company defers advanced royalty payments as deferred revenues
until those royalties are earned. The Company does not offer a refund
or trial period for licensing its technology; however, if the licensing
agreement were terminated prior to earning the advanced royalty payments, the
Company may be required to refund the unearned amount. Between 1997 and 1999,
the customer prepaid $500 per system of the royalties for systems 201 through
410, totaling $105,000. These prepaid revenues have been recorded as
unearned revenue until recognized as revenue during the period that the
corresponding system was sold.
Revenue
Recognition - The Company's revenue primarily comes from royalties derived
through licensing its technology to a single customer. The licensing agreement
allows the customer exclusively to use the Company’s technology in aircraft
systems manufactured by the customer in exchange for a royalty fee for each
system sold by the customer that includes the Company’s technology. The royalty
fee is payable quarterly and amounts to $800 per aircraft system for systems 201
through 2,000. There are provisions for the royalty fee to increase to $1,400
per system after 2,000 cumulative systems have sold, to increase to $3,800 per
system after 5,000 cumulative systems have sold, and to decrease to $200 per
system after 10,000 cumulative systems have sold, provided the customer sells
enough systems to reach any of these scheduled adjustments to the royalty
fee. As of September 30, 2007, the customer had sold a total of 431
cumulative aircraft systems since the licensing agreement was signed in 1997.
The licensing agreement continues in effect as long as the customer continues to
use the Company’s technology in aircraft systems it manufactures. The Company
recognizes its royalty revenues as the customer sells aircraft systems that
include the Company’s technology. At that time, in accordance with the license
agreement, the royalty fee has been earned by the Company, there is
an
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE FINANCIAL STATEMENTS
NOTE 1 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
agreed upon amount for the royalty fee,
and collection of the royalty is reasonably assured because the customer has
timely made all payments required under the license agreement since it was
signed in 1997. The Company has also generated some revenues from consulting
arrangements where the Company has assembled existing equipment and ready the assembled equipment for
shipment in accordance with the requirements of the Company’s export license.
Consulting revenue is recognized when the equipment has been assembled, there is
an agreed upon price for the services, and collection of the revenue is
reasonably assured.
NOTE 2 -
RESTATEMENTS
The
accompanying financial statements for the years ended September 30, 2007 and
2006 have been restated to correct errors in prior period financial
statements. Previously, the Company did not include Parent’s retained
deficit from the technology licensing business and the Company recognized all of
the revenues from $105,000 of advance royalty payments in the periods when the
advances were received. The Company has recorded Parent’s retained
deficit at September 30, 2005 totaling $738,508 with an offsetting increase to
capital in excess of par value. Since only 57 of the 210 systems
prepaid by the advance royalty payments had sold through September 30, 2005, the
Company has also recorded the $76,500 unearned portion of the advanced royalty
payments at September 30, 2005 as a current liability with an offsetting
increase to retained deficit. The effects of the restatements on the
Company’s annual financial statements are as follows:
|
|
|
|
|
|
|
As Reported
|
As Restated
|
As Reported
|
As Restated
|
As Reported
|
As Restated
|
|
Unearned
Revenues
|
$-
|
$-
|
$-
|
$30,500
|
$-
|
$76,500
|
|
Total
Current Liabilities
|
$14,788
|
$14,788
|
$108,207
|
$138,707
|
$100,693
|
$177,193
|
|
Total
Liabilities
|
$14,856
|
$14,856
|
$108,207
|
$138,707
|
$100,693
|
$177,193
|
|
Capital
in Excess of Par Value
|
$260,111
|
$998,619
|
$(38,239)
|
$700,269
|
$(93,308)
|
$645,200
|
|
Retained
Deficit
|
$(124,054)
|
$(862,562)
|
$(62,276)
|
$(831,284)
|
$-
|
$(815,008)
|
|
Total
Stockholders’ Equity (Deficit)
|
$142,057
|
$142,057
|
$(94,515)
|
$(125,015)
|
$(93,308)
|
$(169,808)
|
|
Royalty
Revenues
|
$35,100
|
$65,600
|
$27,600
|
$73,600
|
Not
Applicable
|
Not
Applicable
|
|
Total
Revenues
|
$35,100
|
$65,600
|
$33,815
|
$79,815
|
Not
Applicable
|
Not
Applicable
|
|
Net
Income (Loss)
|
$(61,778)
|
$(31,278)
|
$(62,276)
|
$(16,276)
|
Not
Applicable
|
Not
Applicable
|
|
Basic
and Diluted Net Income (Loss) per Share
|
$(0.01)
|
$(0.00)
|
$
(0.01)
|
$(0.00)
|
Not
Applicable
|
Not
Applicable
|
The
effects of the restatements on the Company’s quarterly condensed financial
information are as follows:
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE FINANCIAL STATEMENTS
NOTE 2 –
RESTATEMENTS (continued)
|
|
|
|
|
|
|
As Reported
|
As Restated
|
As Reported
|
As Restated
|
As Reported
|
As Restated
|
|
Unearned
Revenues
|
$-
|
$19,500
|
$-
|
$9,500
|
$-
|
$1,000
|
|
Total
Current Liabilities
|
$113,345
|
$132,845
|
$147,188
|
$156,688
|
$162,218
|
$163,218
|
|
Capital
in Excess of Par Value
|
$(36,667)
|
$701,841
|
$(35,115)
|
$703,393
|
$(33,531)
|
$704,977
|
|
Retained
Deficit
|
$(65,408)
|
$(823,416)
|
$(93,888)
|
$(841,896)
|
$(109,799)
|
$(849,307)
|
|
Total
Stockholders’ Equity (Deficit)
|
$(96,075)
|
$(115,575)
|
$(123,003)
|
$(132,503)
|
$(137,330)
|
$(138,330)
|
|
Royalty
Revenues
|
$
6,600
|
$
17,600
|
$
6,000
|
$
16,000
|
$
5,100
|
$
13,600
|
|
Net
Income (Loss)
|
$
(3,132)
|
$
7,868
|
$
(28,480)
|
$
(18,480)
|
$
(15,911)
|
$
(7,411)
|
|
Basic
and Diluted Net Income (Loss) per Share
|
$
(0.00)
|
$
0.00
|
$
(0.00)
|
$(0.00)
|
$
(0.00)
|
$
(0.00)
|
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE FINANCIAL STATEMENTS
NOTE 2 –
RESTATEMENTS (continued)
|
|
|
|
|
|
|
As Reported
|
As Restated
|
As Reported
|
As Restated
|
As
Reported
|
As Restated
|
|
Unearned
Revenues
|
$-
|
$66,000
|
$-
|
$58,000
|
$-
|
$40,000
|
|
Total
Current Liabilities
|
$92,730
|
$158,730
|
$103,460
|
$161,460
|
$174,758
|
$214,758
|
|
Capital
in Excess of Par Value
|
$(73,236)
|
$665,272
|
$(61,349)
|
$677,159
|
$(50,680)
|
$687,828
|
|
Retained
Deficit
|
$(14,984)
|
$(819,492)
|
$(38,475)
|
$(834,983)
|
$(48,211)
|
$(826,719)
|
|
Total
Stockholders’ Equity (Deficit)
|
$(88,220)
|
$(154,220)
|
$(99,824)
|
$(157,824)
|
$(92,891)
|
$(132,891)
|
|
Royalty
Revenues
|
$
6,300
|
$
16,800
|
$
4,800
|
$
12,800
|
$10,800
|
$28,800
|
|
Total
Revenues
|
$
6,300
|
$
16,800
|
$
4,800
|
$
12,800
|
$
13,907
|
$
31,907
|
|
Net
Income (Loss)
|
$
(14,984)
|
$
(4,484)
|
$
(23,491)
|
$(15,491)
|
$
(9,736)
|
$
8,264
|
|
Basic
and Diluted Net Income (Loss) per Share
|
$
(0.00)
|
$
0.00
|
$
(0.00)
|
$(0.00)
|
$
(0.00)
|
$
(0.00)
|
NOTE 3 -
GOING CONCERN
The
Company’s financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. At September 30, 2007, the
Company had a retained deficit of $862,562. During the years ended September 30,
2007 and 2006, respectively, the Company incurred losses of $31,278 and $16,276
and experienced negative cash flows from operations of $86,311 and $1,731. These
factors create an uncertainty about the Company’s ability to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
The
Company’s continuation as a going concern is dependent upon its ability to
increase revenues, decrease or contain costs, and achieve profitable operations.
In this regard, Company management is proposing to develop additional
applications for the Company’s technology, specifically in security system
surveillance. Management estimates 12 to 15 months before the Company will start
realizing revenues from security system surveillance applications. Should the
Company’s financial resources prove inadequate to meet the Company’s needs
before additional revenue sources can be realized, the Company may raise any
necessary additional funds through loans or through sales of common stock. There
is no assurance that the Company will be successful in achieving profitable
operations or in raising any additional capital.
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE FINANCIAL STATEMENTS
NOTE 4 -
RELATED PARTY TRANSACTIONS
Related
Party Loans - During the years ended September 30, 2007 and 2006, respectively,
an officer of the Company loaned $4,800 and $8,350 to the Company and Parent,
and the Company and Parent repaid loans totaling $82,550 and $1,600. At
September 30, 2007 and 2006, the Company and Parent owed a total of $0 and
$77,750 to the officer. The loans were non-interest-bearing and were due on
demand; however, the Company and Parent imputed interest at an annual rate of
8%. During the years ended September 30, 2007 and 2006, respectively, the
Company and Parent imputed interest expense of $4,887 and $6,030.
Stock
Issuance - In April 2006, the Company issued 6,000,000 shares of common stock to
Parent for services valued at $2,000 and for cash of $1,000 ($0.0005 per share)
that was received in August 2006.
Capital
Contributions - In July 2007, Parent made cash contributions to the Company
totaling $293,463.
During
the year ended September 30, 2006, Parent issued its preferred stock to pay a
liability of $8,000 and for services valued at $44,039 (of which Parent’s
directors provided $32,629). These stock issuances by Parent have been included
in the accompanying financial statements as capital contributions.
Management
Compensation - The Company has not paid any compensation to any officer or
director of the Company because they have not yet performed any significant
services for the Company.
Office
Space - In January 2006, Parent started renting office space from an officer of
the Company for $400 per month. The Company is continuing to rent office space
from the officer. During the years ended September 30, 2007 and 2006, the
Company and Parent paid or accrued $4,800 and $3,600 in rent to the
officer.
NOTE 5 –
PROPERTY AND EQUIPMENT
|
|
|
|
Estimated
Useful
Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
equipment
|
|
5
years
|
|
$
|
39,386
|
|
|
$
|
39,386
|
|
|
Office
equipment
|
|
5 -
10 years
|
|
|
1,686
|
|
|
|
753
|
|
|
|
|
|
|
|
|
41,072
|
|
|
|
40,139
|
|
|
Less
accumulated depreciation
|
|
|
(
|
39,634
|
)
|
|
(
|
39,419
|
)
|
|
Net
property and equipment
|
|
|
$
|
1,438
|
|
|
$
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE FINANCIAL STATEMENTS
NOTE 6 –
DEFINITE-LIFE INTANGIBLE ASSETS
|
|
|
|
Estimated
Useful Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pending
patent application
|
Not
applicable
|
|
$
|
16,765
|
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
16,765
|
|
|
|
3,000
|
|
|
Less
accumulated amortization
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
definite-life intangible assets
|
|
$
|
16,765
|
|
|
$
|
3,000
|
|
The
Company's definite-life intangible assets consist only of a pending patent
application. Once a patent has been granted, the Company will amortize the
related costs over the estimated useful life of the patent. If a patent
application is denied, the related costs will be expensed immediately. It is
anticipated that the US Patent Office will respond to the pending patent request
during 2008. Management compared the estimated cost of the patent of
approximately $20,000 to management’s estimate of the market for products
utilizing the patent, if granted, in determining the recoverability of this
asset.
NOTE 7 –
UNEARNED REVENUES
|
|
|
|
|
Balance
at beginning of year
|
$ 30,500
|
$ 76,500
|
|
Less
recognized revenues
|
(30,500)
|
(46,000)
|
|
Balance
at end of year
|
$ -
|
$ 30,500
|
NOTE 8 -
CONCENTRATIONS
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE FINANCIAL STATEMENTS
NOTE 9 –
INCOME TAXES
At
September 30, 2007 and 2006, respectively, the Company has net operating loss
carryovers of approximately $14,900 and $2,300 available to offset future
taxable income and expiring in 2027 and 2026. At September 30, 2006, the Company
had experienced losses since inception and had not yet generated any revenues;
therefore, the Company established a valuation allowance to offset the net
deferred tax assets.
The
income tax provision consists of the following components for the years ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
Current
income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred
income tax expense (benefit)
|
|
|
68
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income tax expense (benefit) charged to operations
|
|
$
|
68
|
|
|
$
|
-
|
|
The
income tax provision differs from the amounts that would be obtained by applying
the federal statutory income tax rate to loss before income tax provision as
follows for the years ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
Loss
before income tax provision
|
|
$(
|
31,210
|
)
|
|
$(
|
16,276
|
)
|
|
Expected
federal income tax rate
|
|
|
15.00
|
%
|
|
|
15.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
income tax expense (benefit) at statutory rate
|
|
$(
|
4,682
|
)
|
|
$(
|
2,441
|
)
|
|
Tax
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
Parent's
income and expenses included in operations
|
|
|
2,727
|
|
|
|
2,093
|
|
|
|
Book
basis of patents deducted by Parent
|
|
|
2,514
|
|
|
|
-
|
|
|
|
Imputed
interest expense
|
|
|
27
|
|
|
|
-
|
|
|
|
Meals
and entertainment
|
|
|
100
|
|
|
|
-
|
|
|
|
Organization
costs
|
|
|
-
|
|
|
(
|
270
|
)
|
|
Change
in valuation allowance
|
|
(
|
618
|
)
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income tax expense (benefit)
|
|
$
|
68
|
|
|
$
|
-
|
|
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE FINANCIAL STATEMENTS
NOTE 9 –
INCOME TAXES (Continued)
The
Company’s deferred tax assets, deferred tax liabilities, and valuation allowance
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
Organization
costs
|
|
|
$
|
210
|
|
|
$
|
270
|
|
|
|
Net
operating loss carryovers
|
|
|
2,240
|
|
|
|
348
|
|
|
Total
deferred tax assets
|
|
$
|
2,450
|
|
|
$
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Book
basis of patent application
|
|
$(
|
2,514
|
)
|
|
$
|
-
|
|
|
|
Tax
depreciation in excess of book
|
|
(
|
4
|
)
|
|
|
-
|
|
|
Total
deferred tax liabilities
|
|
$(
|
2,518
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
$
|
2,450
|
|
|
$
|
618
|
|
|
Total
deferred tax liabilities
|
|
(
|
2,518
|
)
|
|
|
-
|
|
|
Valuation
allowance
|
|
|
|
-
|
|
|
(
|
618
|
)
|
|
Net
deferred tax asset (liability)
|
|
$(
|
68
|
)
|
|
$
|
-
|
|
These
amounts have been presented in the financial statements as follows:
|
Current
deferred tax asset (liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
Non-current
deferred tax asset (liability)
|
(
|
68
|
)
|
|
|
-
|
|
|
|
|
|
|
$(
|
68
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
INFRARED
SYSTEMS INTERNATIONAL
CONDENSED
BALANCE SHEETS
|
ASSETS
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
$
|
193,920
|
|
$
|
118,904
|
|
Accounts
receivable
|
|
4,800
|
|
|
17,400
|
|
Prepaid
expenses
|
|
4,964
|
|
|
2,406
|
|
Total
Current Assets
|
|
203,684
|
|
|
138,710
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
1,316
|
|
|
1,438
|
|
|
|
|
|
|
|
|
DEFINITE-LIFE
INTANGIBLE ASSETS
|
|
17,465
|
|
|
16,765
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
$
|
222,465
|
|
$
|
156,913
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Accounts
payable
|
$
|
17,220
|
|
$
|
14,788
|
|
Customer
deposits
|
|
118,300
|
|
|
-
|
|
Total
Current Liabilities
|
|
135,520
|
|
|
14,788
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAX LIABILITY
|
|
-
|
|
|
68
|
|
Total
Liabilities
|
|
135,520
|
|
|
14,856
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 50,000,000 shares authorized, no shares issued
and outstanding
|
|
-
|
|
|
-
|
|
Common
stock, $0.001 par value, 50,000,000 shares authorized, 6,000,000 shares
issued and outstanding
|
|
6,000
|
|
|
6,000
|
|
Capital
in excess of par value
|
|
998,619
|
|
|
998,619
|
|
Retained
earnings (deficit)
|
|
(917,674)
|
|
|
(862,562)
|
|
Total
Stockholders’ Equity
|
|
86,945
|
|
|
142,057
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
222,465
|
|
$
|
156,913
|
See
accompanying notes.
INFRARED
SYSTEMS INTERNATIONAL
UNAUDITED
CONDENSED STATEMENTS OF OPERATIONS
|
|
Three
Months
|
|
Six
Months
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
(Restated)
|
|
|
|
|
(Restated)
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
|
$
|
4,800
|
|
$
|
16,000
|
|
$
|
18,400
|
|
$
|
33,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
-
|
|
|
204
|
|
|
346
|
|
|
204
|
|
Professional
fees
|
|
24,305
|
|
|
25,120
|
|
|
56,000
|
|
|
28,120
|
|
Other
general and administrative
|
|
10,184
|
|
|
5,181
|
|
|
17,191
|
|
|
8,657
|
|
Total
Operating Expenses
|
|
34,489
|
|
|
30,505
|
|
|
73,537
|
|
|
36,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
(29,689)
|
|
|
(14,505)
|
|
|
(55,137)
|
|
|
(3,381)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(38)
|
|
|
(2,423)
|
|
|
(43)
|
|
|
(4,107)
|
|
Related
party interest expense
|
|
-
|
|
|
(1,552)
|
|
|
-
|
|
|
(3,124)
|
|
Total
Other Income (Expense)
|
|
(38)
|
|
|
(3,975)
|
|
|
(43)
|
|
|
(7,231)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAX PROVISION
|
|
(29,727)
|
|
|
(18,480)
|
|
|
(55,180)
|
|
|
(10,612)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
-
|
|
|
-
|
|
|
68
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
$
|
(29,727)
|
|
$
|
(18,480)
|
|
$
|
(55,112)
|
|
$
|
(10,612)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET INCOME (LOSS) PER SHARE
|
$
|
(0.00)
|
|
$
|
(0.00)
|
|
$
|
(0.01)
|
|
$
|
(0.00)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
6,000,000
|
|
6,000,000
|
|
6,000,000
|
|
6,000,000
|
See
accompanying notes.
INFRARED
SYSTEMS INTERNATIONAL
UNAUDITED
CONDENSED STATEMENTS OF CASH FLOWS
|
|
2008
|
|
2007
|
|
|
|
|
|
|
(Restated)
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
(55,112)
|
|
$
|
(10,612)
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
122
|
|
|
132
|
|
|
Imputed
interest
|
|
-
|
|
|
3,124
|
|
|
Net
(increase) decrease in operating assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
12,600
|
|
|
(300)
|
|
|
Prepaid
expenses
|
|
(2,558)
|
|
|
(21)
|
|
|
Net
increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
2,432
|
|
|
37,781
|
|
|
Customer
deposits
|
|
118,300
|
|
|
-
|
|
|
Unearned
revenues
|
|
-
|
|
|
(21,000)
|
|
|
Deferred
income tax liability
|
|
(68)
|
|
|
-
|
|
|
Net
Cash Provided by Operating Activities
|
|
75,716
|
|
|
9,104
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Payments
for definite-life intangible assets
|
|
(700)
|
|
|
(13,365)
|
|
|
Net
Cash Provided (Used) by Investing Activities
|
|
(700)
|
|
|
(13,365)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Payments
on related party loans
|
|
-
|
|
|
(1,200)
|
|
|
Proceeds
from related party loans
|
|
-
|
|
|
2,400
|
|
|
Net
Cash Provided by Financing Activities
|
|
-
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
75,016
|
|
|
(3,061)
|
|
|
|
|
|
|
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
|
118,904
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
CASH
AT END OF PERIOD
|
$
|
193,920
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
$
|
43
|
|
$
|
4,107
|
|
|
Income
taxes
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING
AND
FINANCING ACTIVITIES:
|
|
|
None
|
|
|
|
|
|
See
accompanying notes.
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying financial statements have been prepared by the Company in
accordance with Article 8 of U.S. Securities and Exchange Commission Regulation
S-X. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at March 31, 2008 and 2007 and
for the periods then ended have been made. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been
condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 2007 audited financial
statements. The results of operations for the periods ended March 31,
2008 and 2007 are not necessarily indicative of the operating results for the
full year.
NOTE 2 -
GOING CONCERN
The
Company’s financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. At March 31, 2008,
the Company had a retained deficit of $917,674. During the six months
ended March 31, 2008, the Company incurred a net loss of
$55,112. These factors create an uncertainty about the Company’s
ability to continue as a going concern. The financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
The
Company’s continuation as a going concern is dependent upon its ability to
increase revenues, decrease or contain costs, and achieve profitable
operations. In this regard, Company management is proposing to
develop additional applications for the Company’s technology, specifically in
security system surveillance. Management estimates 6 to 9 months
before the Company will start realizing revenues from security system
surveillance applications. Should the Company’s financial resources
prove inadequate to meet the Company’s needs before additional revenue sources
can be realized, the Company may raise any necessary additional funds through
loans or through sales of common stock. There is no assurance that
the Company will be successful in achieving profitable operations or in raising
any additional capital.
NOTE 3 -
RELATED PARTY TRANSACTIONS
Related
Party Loans - During the six months ended March 31, 2007, an officer of the
Company loaned $2,400 to the Company and Parent, and the Company and Parent
repaid loans totaling $1,200. At September 30, 2007, the Company and
Parent had repaid the loans. During the six months ended March 31,
2007, the Company and Parent imputed interest expense of $3,124.
Office
Space - During the six months ended March 31, 2008 and 2007, the Company and
Parent paid or accrued $2,400 and $2,400 in rent to an officer of the
Company.
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 4 -
PROPERTY AND EQUIPMENT
|
|
Estimated
Useful Lives
|
|
|
|
Optical
equipment
|
5
years
|
|
$
|
39,386
|
|
Office
equipment
|
5 -
10 years
|
|
|
1,686
|
|
|
|
|
|
41,072
|
|
Less
accumulated depreciation
|
|
|
|
(39,756)
|
|
Net
property and equipment
|
|
|
$
|
1,316
|
Depreciation
expense for the six months ended March 31, 2008 and 2007 was $122 and $132,
respectively.
NOTE 5 -
DEFINITE-LIFE INTANGIBLE ASSETS
|
|
Estimated
Useful Life
|
|
|
|
Pending
patent application
|
Not
Applicable
|
|
$
|
17,465
|
|
|
|
|
|
17,465
|
|
Less
accumulated amortization
|
|
|
|
-
|
|
Net
definite-life intangible assets
|
|
|
$
|
17,465
|
The
Company's definite-life intangible assets consist only of a pending patent
application.
NOTE 6 -
CUSTOMER DEPOSITS
At March
31, 2008, the Company had received cash deposits of $118,300 from a customer in
Taiwan to purchase infrared detectors, affix them to cameras supplied by the
customer, and ready them for shipment back to the customer in accordance with
the requirements of the Company’s export license. Although the terms
of the arrangement provide that the deposits are not refundable, the Company has
recorded them as of March 31, 2008 as a current liability because the earnings
process was incomplete. The Company will use approximately $112,000
of the deposits to purchase the infrared detectors in accordance with the
customer’s specifications. After the Company ships the assembled
cameras with infrared detectors, the Company will recognize as revenue the net
amount of the deposits related to its services, which amount is expected to be
approximately $6,000.
NOTE 7 -
CONCENTRATIONS
NOTE 8 -
INCOME TAXES
At March
31, 2008, the Company has federal net operating loss carryovers of approximately
$69,500 available to offset future taxable income and expiring in 2026, 2027,
and 2028. At March 31, 2008, the Company had experienced losses since
inception and had not yet generated any taxable income; therefore, the Company
established a valuation allowance to offset the net deferred tax
assets.
INFRARED
SYSTEMS INTERNATIONAL
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 8 -
INCOME TAXES (continued)
The
income tax provision consists of the following components for the six months
ended March 31, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Current
income tax expense (benefit)
|
$
|
-
|
|
$
|
-
|
|
Deferred
income tax expense (benefit)
|
|
(68)
|
|
|
-
|
|
Net
income tax expense (benefit) charged to operations
|
$
|
(68)
|
|
$
|
-
|
The
income tax provision differs from the amounts that would be obtained by applying
the federal statutory income tax rate to loss before income tax provision as
follows for the six months ended March 31, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Loss
before income tax provision
|
$
|
(55,112)
|
|
$
|
(10,612)
|
|
Expected
federal income tax rate
|
|
15.0%
|
|
|
15.0%
|
|
Expected
income tax expense (benefit) at statutory rate
|
$
|
(8,267)
|
|
$
|
(1,592)
|
|
Tax
effect of:
|
|
|
|
|
|
|
Parent’s
expenses included in operations
|
|
-
|
|
|
1,538
|
|
Meals
and entertainment
|
|
228
|
|
|
-
|
|
Change
in valuation allowance
|
|
7,971
|
|
|
54
|
|
Net
income tax expense (benefit)
|
$
|
(68)
|
|
$
|
-
|
The
Company’s deferred tax assets, deferred tax liabilities, and valuation allowance
are as follows:
|
|
|
|
Deferred
tax assets:
|
|
|
|
Organization
costs
|
$
|
180
|
|
Net
operating loss carryovers
|
|
10,427
|
|
Total
deferred tax assets
|
$
|
10,607
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Book
basis of patent application
|
$
|
(2,620)
|
|
Tax
depreciation in excess of book
|
|
(16)
|
|
Total
deferred tax liabilities
|
$
|
(2,636)
|
|
|
|
|
|
Total
deferred tax assets
|
$
|
10,607
|
|
Total
deferred tax liabilities
|
|
(2,636)
|
|
Valuation
allowance
|
|
(7,971)
|
|
Net
deferred tax asset (liability)
|
$
|
-
|
These
amounts have been presented in the financial statements as follows:
|
|
|
|
Current
deferred tax asset (liability)
|
$
|
-
|
|
Non-current
deferred tax asset (liability)
|
|
-
|
|
|
$
|
-
|
