Healthcare Solutions Management Group, Inc. - Quarter Report: 2010 December (Form 10-Q)

form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

{X} QUARTERLY REPORT PURSUANT TO SECTION 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE EXCHANGE ACT

For transition period from _______________ to _______________

Commission File Number: 0-17953

Infrared Systems International

(Exact Name of Registrant as Specified in its Charter)

Nevada		38-3767357
(State or other jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

4550 NW Newberry Hill Road, Suite 202,

Silverdale WA 98383

(Address of Principal Executive Offices) (zip code)

(360) 473-1160

(Issuer's telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES {X} NO { }

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer { } Accelerated filer { }

Non-accelerated filer { } Smaller reporting company { X }

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES { } NO {X}

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of February 17, 2011, there were 200,493,870 shares of common stock outstanding.

INFRARED SYSTEMS INTERNATIONAL – QUARTERLY REPORT ON FORM 10-Q

Table of Contents

	PAGE
PART I
Item 1. Financial Statements		3

Balance Sheets		3

Statement of Operations		4

Statement of Cash Flow		5

Notes		6-7

Item 2. Management's Discussion and Analysis of financial condition and results of Operations		8

Item 3. Quantitative and Qualitative Disclosures about Market Risk		11

Item 4. Controls and Procedures		11
PART II
Item 1. Legal Proceedings		12

Item 1A. Risk Factors		12

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		12

Item 3. Defaults Upon Senior Security		12

Item 4. Submission of Matters to a Vote of Securities Holders		12

Item 5. Other Information		12

Item 6. Exhibits		13

Signatures		14

PART I Financial Information

ITEM 1. FINANCIAL STATEMENTS

INFRARED SYSTEMS INTERNATIONAL

AND ITS WHOLLY OWNED SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

	December 31,			September 30,
	2010			2010
	(unaudited)

CURRENT ASSETS:
Cash	$	82,074		$	1,034
Accounts receivable		9,407			16,008

Total Current Assets		91,481			17,042

PROPERTY AND EQUIPMENT, net		9,816			5,000

INVENTORY		6,742			-


TOTAL ASSETS	$	108,038		$	22,042


LIABILITIES AND STOCKHOLDERS' (DEFICIT)

CURRENT LIABILITIES:
Accounts payable	$	121,627		$	100,513
Credit cards payable		47,065			46,262
Notes payable		293,977			260,695
Other liabilities		35,114			36,599

Total Current Liabilities		497,783			444,069

STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 661,618 and 285,618 shares issued and outstanding, respectively		662			286
Common stock, $0.001 par value, 500,000,000 shares authorized, 200,493,870 and 187,243,870 shares issued and outstanding, respectively		200,494			187,244
Capital in excess of par value		1,806,272			1,414,898
Retained earnings (Deficit)		(2,397,173	)		(2,024,455	)

Total Stockholders' (Deficit)		(389,745	)		(422,027	)


TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	108,038		$	22,042

See accompanying notes.

INFRARED SYSTEMS INTERNATIONAL

AND ITS WHOLLY OWNED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009 (Unaudited)

	December 31, 2010			December 31, 2009
REVENUES:
Royalty	$	17,600		$	16,800
Sales		114,217			-
Service		11,763			-
Total Revenues		143,580			16,800

COST OF GOODS SOLD		46,524			-

GROSS PROFIT		97,056			16,800


OPERATING EXPENSES:
Consulting fees		15,075			-
Management fees		20,890			1,895
Payroll expense		24,773			-
Professional fees		31,657			21,280
Research and development		2,434			229
Travel, meals, and entertainment		3,387			2,926
Loss on goodwill impairment, AquaLiv		315,484			-
Other general and administrative		53,498			6,200

Total Operating Expenses		467,198			32,530


LOSS FROM OPERATIONS		(370,142	)		(15,730	)

OTHER INCOME (EXPENSE):
Interest expense		(2,577	)		(857	)


LOSS BEFORE INCOME TAX PROVISION		(372,718	)		(16,587	)

PROVISION FOR INCOME TAXES		-			-


NET LOSS	$	(372,718	)	$	(16,587	)

BASIC AND DILUTED LOSS PER SHARE	$	(0.00	)	$	(0.00	)

WEIGHTED AVERAGE SHARES OUTSTANDING		200,493,870			11,672,790

See accompanying notes.

INFRARED SYSTEMS INTERNATIONAL

AND ITS WHOLLY OWNED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009 (UNAUDITED)

	December 31, 2010			December 31 2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(372,718	)	$	(16,587	)
Adjustments to reconcile net loss to net cash by operating activities:
Depreciation		700			395
Net (increase) decrease in operating assets:
Accounts receivable		6,601			13,600
Prepaid expenses					6,400
Net increase (decrease) in operating liabilities:
Accounts payable		21,114			9,165
Credit cards payable		803			-
Customer deposits		-			(12,600	)
Other liabilities		(1,485	)		-

Net Cash Provided (Used) by Operating Activities		(344,985	)		373


CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for definite-life intangible assets		(5,516	)		(1,000	)
Net changes in inventory		(6,742	)		-

Net Cash Provided (Used) by Investing Activities		(12,258	)		(1,000	)


CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes		33,283			-
Proceeds of capital stock issuance		405,000			-

Net Cash Provided by Financing Activities		438,283			-

NET INCREASE (DECREASE) IN CASH		1,040			(627	)

CASH AT BEGINNING OF PERIOD		81,034			1,015


CASH AT END OF PERIOD	$	82,074		$	388

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	2,577		$	857
Income taxes	$	-		$	-

See accompanying notes.

INFRARED SYSTEMS INTERNATIONAL

NOTES TO THE CONSILIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 December 31, 2010 and 2009 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, 2010 audited financial statements. The results of operations for the periods ended December 31, 2010 and 2009 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 December 31, 2010, the Company had a retained deficit of $2,397,173 and current liabilities in excess of current assets by $389,745. During the three months ended December 31, 2010, the Company incurred a net loss of $372,718 and negative cash flows from operations of $370,142. 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 focused on the development and expansion of the Company’s technology, including remote desktop and cloud computing, VoIP telephony, water filtration and purification, and the licensing of patents, as well as exploring strategic acquisitions in the technology field. Should the Company’s financial resources prove inadequate to meet the Company’s needs before additional revenue sources can be realized, the Company may raise additional funds through loans or through sales of common or preferred 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

Shareholder Loans - During the three months ended December 31, 2010, the Company’s officer, through a company in his control, loaned an additional $4,000 to the Company and its subsidiaries. The loan bears no interest and is due on demand. Additionally, the Company’s officer extended an additional use of credit in the amount of $1,377.75 during the same three months. The credit carries an interest rate of 15.24%.

Management Compensation - During the three months ended December 31, 2010 and 2009, respectively, the Company paid or accrued salary and management fees of $20,890 and $1,895 to its officers.

Office Space - During the three months ended December 31, 2010 and 2009, respectively, the Company paid or accrued $0 and $2,700 in rent to a former officer.

NOTE 4 - PROPERTY AND EQUIPMENT

Estimated Useful Lives		December 31, 2010

Optical equipment	5 years	$	39,386
Office equipment	3 - 10 years		8,231
Computers and peripherals	5 years		16,000
Furniture and fixtures	5 years		5,516

			69,133
Less accumulated depreciation			(59,317	)

Net property and equipment		$	9,816

Depreciation expense for the three months ended December 31, 2010 and 2009 was $700 and $395, respectively.

NOTE 5 – AQUALIV ACQUISITION

	December 31, 2010

Acquisition value

Preferred shares (per contract)	$	400,000
Total Acquisition value	$	400,000

Valuation classification
Physical Assets	$	5,516
Cash		79,000

Goodwill		315,484
Impairment of Goodwill		(315,484	)
Goodwill, net		-

Net value	$	84,516

NOTE 6 – INVENTORY


	December 31, 2010

Inventory - beginning of period	$	-
Change in inventory		6,742

Inventory - end of period	$	6,742

INFRARED SYSTEMS INTERNATIONAL

NOTES TO THE CONSILIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 - CONCENTRATIONS

At December 31, 2010, 22% of the Company's accounts receivable was due from a single customer. During the three months ended December 31, 2010, 32% of the Company’s service revenue was generated from a single customer, 100% of the Company's royalty revenues was generated from a single licensee in that category, and 1.8% of sales revenue was generated from a single customer. Compared to total revenue, 12% was generated from a single customer during the three months ended December 31, 2010, compared to the three months ended December 31, 2009, where 100% of the Company's revenues were generated from a single customer.

NOTE 8 – INCOME TAXES

At September 30, 2010, the Company has federal net operating loss carryovers of $608,000 available to offset future taxable income and expiring as follows: $2,320 in 2026, $12,616 in 2027, $127,675 in 2028, $38,545 in 2029, and $428,000 in 2030. The Company also has a federal contribution carryover of $150 that expires in 2014. At December 31, 2010, the Company had experienced losses since inception and had not yet generated any taxable income; therefore, the Company established a valuation allowance to offset the net deferred tax assets. The income tax provision consists of the following components for the three months ended December 31, 2010 and 2009:

	2010		2009
Current income tax expense (benefit)	$	-	$	-
Deferred income tax expense (benefit)		-		-
Net income tax expense (benefit) charged to operations	$	-	$	-

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 three months ended December 31, 2010 and 2009:

	2010			2009
Loss before income tax provision	$	(372,718	)	$	(15,730	)
Expected federal income tax rate		15.0	%		15.0	%
Expected income tax expense (benefit) at statutory rate	$	(55,908	)	$	(2,360	)
Tax effect of:
Meals and entertainment		508			439
Change in valuation allowance		55,400			1,921
Net income tax expense (benefit)	$	-		$	-

The Company’s deferred tax assets, deferred tax liabilities, and valuation allowance are as follows:

	December 31, 2010
Deferred tax assets:
Organization costs	$	60
Contribution carryover		23
Net operating loss carryovers		33,220
Total deferred tax assets	$	33,303

Deferred tax liabilities:
Book basis of patent application	$	(5,246	)
Tax depreciation in excess of book		(498	)
Total deferred tax liabilities	$	(5,744	)

Total deferred tax assets	$	33,303
Total deferred tax liabilities		(5,744	)
Valuation allowance		(27,559	)
Net deferred tax asset (liability)	$	-

These amounts have been presented in the financial statements as follows:

	June 30, 2010
Current deferred tax asset (liability)	$	-
Non-current deferred tax asset (liability)		-
	$	-

NOTE 9 - SUBSEQUENT EVENTS

On January 27, 2011, Infrared Applications Inc. (IAI) received a payment on the defaulted promissory note in the amount of $9,400 from Take Flight Equities, Inc.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The management discussions contain certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. When used in this document, the words "anticipate," "believe," "estimate," "expect," "intend," "will," "plan," "should," "seek," and similar expressions, are intended to identify forward-looking statements. Such statements reflect the current view of management regarding future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual actions or results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The following discussion and analysis should be read in conjunction with the company's consolidated financial statements and related footnotes for the year ended September 30, 2009. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

Overview

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.

In March 2010, ISI transferred all of the assets and liabilities of ISI into a newly created wholly-owned subsidiary, Infrared Applications, Inc. (IAI). Since that time, IAI continues to operate the previous business of ISI under this newly created company.

On April 12, 2010, ISI sold a majority interest in its common stock to Take Flight Equities, Inc (TFE). As part of the agreement, a change in control took place and William Wright was appointed CEO of ISI. Also included in the agreement were provisions for the future distribution of the IAI assets to the ISI shareholders of record on March 23, 2010 within 15 months of the agreement.

On April 19, 2010, the Company acquired 100% of the outstanding common stock of Focus Systems, Inc. (Focus) from Propalms, Inc. (Propalms) in exchange for 3,000,000 Common shares and 250,000 Preferred Series A shares of the Company. Additionally, the Company issued 500,000 shares of Preferred A stock to Propalms and Propalms was to invest up to $250,000 into the company over a period of 120 days. Propalms subsequently invested $17,809 and returned 464,382 Preferred Series A shares to the Company. The primary purpose of the acquisition is to provide the Company with an operating business in the cloud computing, remote desktop, and Voice over IP telecommunications space. Included in the acquisition, the Company recognized the fair market value of property, plant and equipment at $5,000 based on as search of age comparable equipment available in the local market. Liabilities acquired in the acquisition totaled $305,595. Focus is held and operated as a wholly-owned subsidiary of ISI.

IAI, and prior to its formation in 2010, its parents, has been engaged in the development of infrared products for commercial applications. Since 2006, IAI 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 IAI (or prior to its formation its parents) for more than four years, although IAI has various proprietary technology developed by its parent prior to that time. One June 15, 2010, a patent was issued by the US Patent Office to Infrared Applications Inc. PN: 7,738,008 B1, Ball, “Infrared Security System & Method”.

Focus was formed in August of 2007 as a technology company providing remote desktop – cloud computing – services and Voice over Internet Protocol (VoIP) phone services to small and mid-sized businesses. For the calendar year 2008, Focus operated a regional Internet Service Provider (ISP) business under a management agreement with a third party.

ISI's revenues during the past three years have been derived from only two sources: a 1997 license agreement relating to proprietary technology utilized by Kollsman Instruments for its Enhanced Visions System for commercial aviation; and acting on behalf of a Taiwanese company in connection with the acquisition and modification of infrared camera systems in the U.S. for thermal imaging of the human body for medical purposes and exporting the modified products to the Taiwanese company. The services rendered for the Taiwanese corporation are commercial labor and transportation, and no technology of ISI is involved.

On July 26, 2010, TFE defaulted in its payment obligations under the note and voting control of the stock was subsequently transferred to Gary Ball. On January 27, 2011, TFE began making payments on the promissory note.

On December 20, 2010, the Company filed an 8-K announcing the acquisition of an interest in AquaLiv, Inc. (“AquaLiv”) on December 16, 2010. Pursuant to the Agreement included in the filing, the Company acquired 50% of the outstanding stock of AquaLiv from Craig Hoffman for $400,000 paid in the form of 400,000 shares of Infrared Systems Series A Preferred stock valued at $1.00 per share. Mr. Hoffman will remain as AquaLiv’s President and CEO following the transaction.

AquaLiv, Inc. is a life sciences research and development company best known for its health-enhancing water purification system. Recent advancements in AquaLiv's technology uncovered a new field of biological information science. With direct applications in the industries of water purification, environmental science, agriculture, animal husbandry, personal use products, and medicine, AquaLiv is ready to expand its innovative product offering.

Focus Systems, Inc.

Remote Desktop and Cloud Computing – A remote device runs the client software that implements the chosen protocol(s) and allows the user to access an entire desktop environment that is being projected from a remote server or group of servers. Although the remote device may be a personal computer running an agent, the remote device, sometimes called a “Thin Client,” does not need to have a large amount of memory or storage. In fact, it may offer no local storage at all. The remote device does not need to be based upon the same hardware architecture or operating system as used by the remote servers. It is quite possible for a small, hand held device based upon an X-scale processor running some embedded operating system to display Linux, Windows, UNIX or even Z/OS applications.

The Company believes that there are inherent benefits of operating in a completely portable desktop office environment. Remote desktop users can access their same computer desktop from the office, at home, a mobile device, or virtually anywhere in the world. Access to central data and shared recourses will increase productivity and reduce cost for businesses. The remote environment is controlled, managed and updated by the Company from a centralized location, further reducing operating costs for its customers.

VoIP Phone Service - VoIP phone service is a method for taking analog audio signals (similar to the kind you hear when you talk on the phone) and turning them into digital data that can be transmitted over the Internet. This allows VoIP service to replace traditional landline service for business and residential customers. Since VoIP phone service is digital, companies can run both data and voice over the same network infrastructure greatly reducing costs. This reduction in cost is experienced in both the initial start up phase, as well as the ongoing maintenance and services fees associated with phone service. Company management believes that the trend away from traditional phone service to digital VoIP services will continue to grow.

Infrared Applications, Inc.

Enhanced Vision System - 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 currently is $800 per unit. We recognize our royalty revenues when Kollsman sells aircraft systems. In accordance with the license agreement, the royalty fee has been earned by us. The 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.

Infrared Security System - Our infrared security system called HarmAlarm is based upon a unique and patent protected concept. The HarmAlarm utilizes two cameras (infrared or visual) 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. The camera’s processors perform image analysis 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. An alarm criterion is based upon object size, location, and movement. We believe this system has a powerful threat detection capability that inherently rejects false alarms.

A patent was issued by the US Patent Office to Infrared Applications Inc. PN: 7,738,008 B1, Ball, “Infrared Security System & Method”, June 15, 2010. The revolutionary nature of the new concept will require a significant effort to ascertain it value in the market. All industry contacts are done under strict rules of mutual confidentiality. A technology based web site has been constructed. This web site may be viewed at http://HarmAlarm.com. The web site contains the patent, “How it works”, potential configurations, published articles, unpublished white papers, and general marketing information. This web site is an active site with the addition of new material as it becomes available.

AquaLiv, Inc.

Our research has revealed that all substances have an inherent information signature. Biological systems naturally understand this information and respond to it. While science has not previously detected this powerful aspect of our natural world, AquaLiv's technology can already record, catalog, and mix this bioinformation into unique composites. These composites are designed for specific applications and then programmed into water for delivery to biological systems.

With direct applications in the industries of water purification, environmental science, agriculture, animal husbandry, personal use products, and medicine, AquaLiv is poised to provide innovative ingredient-free solutions to the world's problems.

AquaLiv Water System – The AquaLiv water system addresses every aspect of water to make it whole and full of vital nutrients. The system requires no electicity, is eco-friendly, removes most impurities (including harmful sodium fluoride), and creates a healthful and stable alkaline pH. Users of the AquaLiv Water System have reported stabilized blood sugar, improvements in both high and low blood pressure, reduced allergy symptoms, less headaches, better digestion, and healthy glowing skin. Some diabetics have even reported that AquaLiv helped them decrease their insulin requirements.

AquaLiv Water Stick - AquaLiv Water Stick is a non-toxic and 100% natural mineral clay ceramic stick that features AquaLiv’s BioT™ Bioinformation Technology. While a bit complex and scientific to explain in detail, simply put, the BioT™ Ceramic enhances water with the qualities of several vitamins and herbs. This revolutionary technology turns regular water into a powerful tonic that boosts immunity and encourages wellness. Researchers observed reduced inflammation and common colds in addition to improved hydration, digestion, strength and stamina. AquaLiv has selected several hundred of the world's most renowned medicinal herbs and compounds and blended them in perfect combinations to maximize the potential of the human body. Available in early 2011 will be the Wellness water stick, which has proven to boost the immunity and wellbeing of over 300 test participants. Additional initiatives include an Athletic Performance water stick, and more to follow.

Infotone Face Mist - Infotone Face Mist contains a non-toxic and 100% natural mineral clay ceramic ball that features AquaLiv’s BioT™ Bioinformation Technology. This revolutionary technology turns regular water into a powerful tonic that when misted over the face encourages optimal hydration and clear, youthful, glowing skin. Researchers observed improved hydration, suppleness, firmness, and texture and reduced dryness, oxidation, wrinkles, skin pigmentation, and blemishes. Infotone Face Mist stands apart from other facial water misters because it isn’t just a typical water mister. In fact, no other water mister on the market today utilizes AquaLiv’s BioT™ Bioinformation Technology. Infotone is the first cosmetic of its kind.

Overview of Operations

The serious crash of the world’s financial markets and credit institutions are of a major concern to us. Our existing EVS markets were initially unaffected but as the recession has deepened our sale have declined by approximately 40%. We believe the earliest for a recovery will come from Gulfstream’s G-250 sales beginning in 2011. The G-250 has been acclaimed by industry experts as a superior aircraft. Whether this will translate into sales, and the world market will generate the new customers is yet to be determined. The management of ISI/IAI is concerned that for a multitude of reasons Kollsman could without notice or recourse cease EVS sales operations. These threats come from within and outside of the Elbit Corporation. The external threats are from competing technologies, from like technology improvements, and from regulatory issues. Internal threats recognize commercial aviation is not a core business of Elbit, a very large Aerospace company. Thus the scrutiny on what is best for the parent corporation is a recurring topic. Elbit has sent out mixed signals, expressing a desire to expand the corporation on one hand, to a desire to divest their commercial aviation on the other.

As has been the case with the aviation industry, the technology industry, especially as it applies to the small business sector, has slowed drastically during the recession. New service orders for both remote desktop and VoIP products have been slow since acquisition. Management is working on increasing exposure for its remote desktop product and is working to expand its VoIP phone service from the small business market into the residential market as well. Additionally, management is investigating possible acquisitions that would be accretive to the core business and enable the growth of its revenues both locally and abroad.

Recent advancements in AquaLiv's technology uncovered a new field of biological information science. With direct applications in the industries of water purification, environmental science, agriculture, animal husbandry, personal use products, and medicine, AquaLiv is ready to expand its innovative product offering. While the economy has slowed in recent years, recent sales campaigns have produced positive results for AquaLiv.

Liquidity and Capital Resources

Recent national and global economic conditions have been challenging and unprecedented, particularly in the investment, credit and financial markets. Concerns continue about the impact and the effect the Federal government’s stimulus packages, inflation, volatile energy costs, availability and expenses of credit, stock market swings and the ever increasing national unemployment will play a role in our future. Businesses today are at risk due to limited credit, illiquid credit markets, and an increasingly cautious finance community, all of which leads many institutional investors and private investors to reduce and/or cease funding to borrowers. If the current economic and credit market conditions continue in this manner, more businesses will close and consumer’s confidence will wane even further. Our company is experiencing a direct impact of the above mentioned economic conditions because certain private investors, although optimistic of our industry’s long-term outlook and our business model/plan, are not willing at this time to commit funds until they see an upward trend in the national economy. In addition, many individuals across the nation are facing uncertainties with their continued employment, coupled with higher living costs, are curtailing or eliminating their spending habits and refraining from making changes in their operations.

Results of Operations for the Three Months Ended December 31, 2010 compared with the Three Months Ended December 31, 2009.

Revenues

The revenues for the three months ending December 31, 2010 were $143,580 as compared to $16,800 in the quarter ending December 31, 2010. Sales revenue was added for the first time and comprised of 79.5% of our revenue for the three months ending December 31, 2010, compared to the same three months period in 2009, where zero sales revenue was recorded. Likewise, service revenue accounted for 8% and 0% of our revenues for the three months ending December 31, 2010 and 2009, respectively. The Company’s royalty revenue has remained relatively consistent in terms of gross dollars, but has accounted for less of our overall revenue in recent quarters. Royalty revenue accounted for 12% and 100% during the three months ending December 31, 2010 and 2009, respectively.

Cost of Goods Sold

Cost of goods sold for the three months ending December 31, 2010 and 2009 were $46,524 (32% of total revenues) and $0, respectively.

Operating Expenses

Operating expenses for the three months ending December 31, 2010 were $467,198 as compared to $32,530 for the quarter ending December 31, 2009. The increase of $15,075 in consulting fees, increase of $18,995 in management fees, increase of $24,773 in payroll expense, increase of $10,377 in professional fees, increase of $2,205 in research and development, increase of $461 in travel expense, and increase of $47,298 in general and administrative fees is due in part to the increased costs of running additional businesses compared to the quarter ending December 31, 2009. The increase of $315,484 in loss on goodwill impairment, AquaLiv, was due to the one time write down of goodwill attributed to the acquisition of that business during the quarter ending December 31, 2010. The Company expects operating expenses to remain higher that previously comparable quarters as the Company expands its services.

Other Income and Expense

Interest expense for the three months ended December 31, 2010 was $2,577, as compared to $857 for the three months ended December 31, 2009. The increase in interest expense was due to an increase in credit card debt and net borrowing.

Net (Loss) Before Provision for Income Taxes

The net loss for the three months ended December 31, 2010 was $372,718 as compared to $16,587 for the three months ended December 31, 2009. The increase in net loss is attributed to the increase in our operating expenses due to the subsidiary changes and business additions to the Company, as well as the one time write off of goodwill attributed to the AquaLiv acquisition.

Going Concern

We have limited working capital and limited revenues from sales of products, services, or licenses. During 2010, a majority of our revenues were generated from a single licensee and our operating expenses are greater than our revenues. 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 has caused the Board of Directors to continue to look for sources of investment capital, and investigate merger and acquisition opportunities. We will look to further diversify our holdings and sources of cash flow.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined in Item 10 of Regulation S-K and are not required to report the quantitative and qualitative measures of market risk specified in Item 305 of Regulation S-K.

ITEM 4. CONTROLS AND PROCEDURES

(a)	Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are the controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including the principal executive and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We have carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the fiscal quarter covered by this Quarterly Report.

Based on that evaluation, our principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures were not effective as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q for the reasons noted below in our management's report.

(b) Changes in internal controls

The term "internal control over financial reporting" (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, with the participation of the Chief Executive Officer and Principal Financial Officer, has evaluated any changes in the Company's internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, and they have concluded that there was a change to the Company's internal control over financial reporting that may have materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The changes in internal controls were in correlation with the change in control of the Company’s management.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. With the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009 based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as well as criteria established in Items 307 and 308T of Regulation S-K.

The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has determined that material weaknesses exist due to a lack of segregation of duties, resulting from the Company's limited resources.

This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this Quarterly Report on Form 10-Q.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

As a smaller reporting company, the Company is not required to provide disclosure under this Part II, Item 1A.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibit List

3.1

Articles of Incorporation. - filed as an exhibit to the Company’s Registration Statement on Form SB-2 (33-147367) and incorporated herein by reference.

3.2.

By-laws. - filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on September 2, 2008, and incorporated herein by reference.

31.1

Rule 13a-14(a) Certification

32.1

Section 906 Certification

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:	February 18, 2011		IFRARED SYSTEMS INTERNATIONAL
			(Registrant)

		By:	/s/ William M. Wright
			William M. Wright, President, Principal Financial Officer and Director