UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
 
 x           QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
quarterly period ended March 31, 2009
 
  ̈           TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
 
 For the
transition period from _______ to _______
 
 Commission
file number 000-51720
 
 InferX
Corporation
 (Exact
name of registrant as specified in its charter)
 
 Delaware
                  
                  54-1614664(State
      or other jurisdiction of incorporation or organization)
                  
                  (I.R.S.
      Employer Identification No.)46950
      Jennings Farm DriveSuite
      290Sterling,
      Virginia
                  
                  20164(Address
      of principal executive offices)
                  
                  (Zip
      Code)
 
 (703)
444-6030
 (Registrant’s
telephone number, including area code)
 
 1818
Library Street
 Suite
500
 Reston,
Virginia 20190
 (Former
Name, Former Address and Former Fiscal Year
 if
Changed Since Last Report)
 
 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  xNo  ̈
 
 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(Do
      not check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  ̈No x
 
 As
of  March 31, 2009, there were 17,738,510 outstanding shares of the
registrant’s common stock, $.0001 par value.
  
  InferX
Corporation
 Quarterly
Report on Form 10-Q
 for
the Quarterly Period Ended
 March
31, 2009
  INFERX
CORPORATION
 INFERX
CORPORATION
 INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Condensed
      Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December
      31, 2008
                  
                  
                  1Condensed
      Consolidated Statements of Operations for the Three Months
      Ended  March 31, 2009 and 2008 (unaudited)
                  
                  
                  2Condensed
      Consolidated Statements of Cash Flows for the Three Months
      Ended  March 31, 2009 and 2008 (Unaudited)
                  
                  
                  3Notes
      to Condensed Consolidated Financial Statements
                  
                  
                  4
  
  INFERX
CORPORATION
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 MARCH
31, 2009 (UNAUDITED) AND DECEMBER 31, 2008
 
 (UNAUDITED)MARCH 31,
                        
                        
                        DECEMBER 31,2009
                        
                        
                        2008ASSETSCURRENT
      ASSETSCash
                        
                        $
                        107
                        
                        
                        $
                        -Prepaid
      expenses and other current assets
                        
                        
                        -
                        
                        
                        
                        -Total
      current assets
                        
                        
                        107
                        
                        
                        
                        -Fixed
      assets, net of depreciation
                        
                        
                        29,103
                        
                        
                        
                        31,579Other
      AssetComputer
      software development costs, net of amortization
                        
                        
                        121,409
                        
                        
                        
                        140,249Total
      other asset
                        
                        
                        121,409
                        
                        
                        
                        140,249TOTAL
      ASSETS
                        
                        $
                        150,619
                        
                        
                        $
                        171,828LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                        
                        $
                        1,611,468
                        
                        
                        $
                        1,462,684Cash
      overdraft
                        
                        
                        -
                        
                        
                        
                        1,495Liability
      for stock to be issued
                        
                        
                        20,000
                        
                        
                        
                        -Current
      portion of notes payable, net of debt discount of $3,410
                        
                        
                        124,590
                        
                        
                        
                        395,278Total
      current liabilities
                        
                        
                        1,756,058
                        
                        
                        
                        1,859,457Long-term
      LiabilitiesNotes
      payable, net of current portion, net of debt discount of
      $139,391
                        
                        
                        453,369
                        
                        
                        
                        163,540TOTAL
      LIABILITIES
                        
                        
                        2,209,427
                        
                        
                        
                        2,022,997STOCKHOLDERS'
      EQUITY (DEFICIT)Preferred
      stock, par value $0.0001 per share, 10,000,000 shares authorized and no
      shares issued and outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, par value $0.0001 per share, 75,000,000 shares authorized and
      17,738,510 shares issued and outstanding, respectively
                        
                        
                        1,774
                        
                        
                        
                        1,774Additional
      paid-in capital
                        
                        
                        4,948,692
                        
                        
                        
                        4,948,692Retained
      earnings (defict)
                        
                        
                        (7,009,274
                        )
                        
                        
                        (6,801,635
                        )Total
      stockholders' equity (deficit)
                        
                        
                        (2,058,808
                        )
                        
                        
                        (1,851,169
                        )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                        
                        $
                        150,619
                        
                        
                        $
                        171,828
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  1
  INFERX
CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 2009
                      
                      
                      2008REVENUE
                      
                      $
                      -
                      
                      
                      $
                      53,261COST
      OF REVENUESDirect
      labor and other finges
                      
                      
                      -
                      
                      
                      
                      35,307Subcontractor
                      
                      
                      -
                      
                      
                      
                      19,710Other
      direct costs
                      
                      
                      -
                      
                      
                      
                      416Amortization
      of computer software development costs
                      
                      
                      18,840
                      
                      
                      
                      63,091Total
      costs of revenues
                      
                      
                      18,840
                      
                      
                      
                      118,524GROSS
      (LOSS)
                      
                      
                      (18,840
                      )
                      
                      
                      (65,263
                      )OPERATING
      EXPENSESIndirect
      and overhead labor and fringes
                      
                      
                      73,952
                      
                      
                      
                      244,062Professional
      fees
                      
                      
                      30,529
                      
                      
                      
                      96,309Travel
      related costs
                      
                      
                      2,206
                      
                      
                      
                      7,744Rent
                      
                      
                      500
                      
                      
                      
                      27,663General
      and administrative
                      
                      
                      37,628
                      
                      
                      
                      22,680Stock
      issued for services
                      
                      
                      -
                      
                      
                      
                      116,625Stock
      based compensation
                      
                      
                      -
                      
                      
                      
                      33,232Depreciation
                      
                      
                      2,475
                      
                      
                      
                      5,498Total
      operating expenses
                      
                      
                      147,290
                      
                      
                      
                      553,813NET LOSS FROM OPERATIONS BEFORE
      OTHER EXPENSE AND PROVISION FOR INCOME
      TAXES
                      
                      
                      (166,130
                      )
                      
                      
                      (619,076
                      )OTHER
      EXPENSEInterest
      expense, net of interest income
                      
                      
                      41,509
                      
                      
                      
                      3,681NET
      LOSS FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES
                      
                      
                      (207,639
                      )
                      
                      
                      (622,757
                      )Provision
      for income taxes
                      
                      
                      -
                      
                      
                      
                      -NET
      (LOSS) APPLICABLE TO SHARES
                      
                      $
                      (207,639
                      )
                      
                      $
                      (622,757
                      )NET
      (LOSS) PER BASIC AND DILUTED SHARES
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.05
                      )WEIGHTED AVERAGE NUMBER
      OFSHARES
      OUTSTANDING
                      
                      
                      17,738,510
                      
                      
                      
                      11,472,188
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
  2
 
 INFERX
CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 2008
                                    
                                    
                                    2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss)
                                    
                                    $
                                    (207,639
                                    )
                                    
                                    $
                                    (622,757
                                    )Adjustments to reconcile net
      (loss) to net cash
      (used in) operating activities:Stock
      issued for services
                                    
                                    
                                    -
                                    
                                    
                                    
                                    116,625Stock
      based compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    33,232Amortization
      of computer software development costs
                                    
                                    
                                    18,840
                                    
                                    
                                    
                                    63,091Depreciation
                                    
                                    
                                    2,475
                                    
                                    
                                    
                                    5,498Amortization
      of debt discount
                                    
                                    
                                    31,317
                                    
                                    
                                    
                                    -Change
      in assets and liabilitiesIncrease
      in accounts payable and accrued expenses
                                    
                                    
                                    136,609
                                    
                                    
                                    
                                    224,768Total
      adjustments
                                    
                                    
                                    189,241
                                    
                                    
                                    
                                    443,214Net
      cash (used in) operating activities
                                    
                                    
                                    (18,398
                                    )
                                    
                                    
                                    (179,543
                                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (14,978
                                    )Computer
      software development costs
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Net
      cash (used in) investing activities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (14,978
                                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      received for shares of common stock to be issued
                                    
                                    
                                    20,000
                                    
                                    
                                    
                                    -(Decrease)
      in cash overdraft
                                    
                                    
                                    (1,495
                                    )
                                    
                                    
                                    -Borrowings
      of promissory notes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    237,500(Repayment)
      of notes payable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,706
                                    )Net
      cash provided by financing activities
                                    
                                    
                                    18,505
                                    
                                    
                                    
                                    232,794NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                                    
                                    
                                    107
                                    
                                    
                                    
                                    38,273CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,670CASH
      AND CASH EQUIVALENTS - END OF PERIOD
                                    
                                    $
                                    107
                                    
                                    
                                    $
                                    39,943SUPPLEMENTAL
      INFORMATION OF CASH FLOW ACTIVITYCash
      paid during the year for interest
                                    
                                    $
                                    624
                                    
                                    
                                    $
                                    3,148Cash
      paid during the year for income taxes
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -SUPPLEMENTAL
      INFORMATION OF NONCASH ACTIVITYConversion
      of notes payable to liability for stock to be issued/ stock
      issued
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    162,500
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      1-
              ORGANIZATION AND BASIS
      OF PRESENTATION
  The
unaudited condensed consolidated financial statements included herein have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”).  The condensed consolidated financial
statements and notes are presented as permitted on Form 10-Q and do not contain
information included in the Company’s annual statements and
notes.  Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.  It is suggested that these condensed consolidated
financial statements be read in conjunction with the December 31, 2008 audited
financial statements and the accompanying notes thereto.  While
management believes the procedures followed in preparing these condensed
consolidated financial statements are reasonable, the accuracy of the amounts
are in some respects dependent upon the facts that will exist, and procedures
that will be accomplished by the Company later in the year.
  These
unaudited condensed consolidated financial statements reflect all adjustments,
including normal recurring adjustments which, in the opinion of management, are
necessary to present fairly the consolidated operations and cash flows for the
periods presented.
  Black
Nickel Acquisition Corp. I was incorporated in Delaware on May 26, 2005, and was
formed as a vehicle to pursue a business combination. From inception through
October 24, 2006, Black Nickel Acquisition Corp. I, was engaged in
organizational efforts and obtaining initial financing.
  On May
17, 2006, Black Nickel Acquisition Corp. I entered into a letter of intent with
InferX Corporation, a privately-held Virginia corporation (“InferX Virginia”),
with respect to entering into a merger transaction relating to bridge financing
for InferX Virginia and the acquisition of and merger with InferX Virginia. The
transaction closed on October 24, 2006. Following the merger, Black Nickel
Acquisition Corp. I effected a short-form merger of InferX Virginia with and
into Black Nickel Acquisition Corp. I, pursuant to which the separate existence
of InferX Virginia terminated and Black Nickel Acquisition Corp. I changed its
name to InferX Corporation (“InferX” or the “Company”).
  The
transaction was recorded as a recapitalization under the purchase method of
accounting, as InferX became the accounting acquirer. The reported amounts and
disclosures contained in the consolidated financial statements are those of
InferX Corporation, the operating company.
  InferX
was incorporated under the laws of Delaware in 1999. On December 31, 2005,
InferX and Datamat Systems Research, Inc. (“Datamat”), a company incorporated in
1992 under the corporate laws of the Commonwealth of Virginia executed an
Agreement and Plan of Merger (the “Merger”). InferX and Datamat had common
majority directors. The financial statements herein reflect the combined entity,
and all intercompany transactions and accounts have been eliminated. As a result
of the Merger, InferX merged with and into Datamat, the surviving entity. Upon
completion, Datamat changed its name to InferX Corporation.
  InferX
was formed to develop and commercially market computer applications software
systems that were initially developed by Datamat with grants from the Missile
Defense Agency.  Datamat was formed as a professional services
research and development firm, specializing in the Department of Defense. The
Company currently provides services and software to the United States
government, and is in process of formalizing business plans that will enable
them to provide software and services to commercial entities as
well.
  Going
Concern
  As shown
in the accompanying condensed consolidated financial statements the Company has
incurred a loss of $207,639 and $622,757 for the three months ended March 31,
2009 and 2008, respectively, and has a working capital deficiency of $1,755,951
as of March 31, 2009.  The principal reasons for the recurring losses
and working capital deficiency relates to the Company’s continued focus on
refining its products and search for profitable government contracts. The
Company expects the negative cash flow from operations to continue its trend
through the next twelve months, however continues to expand their pipeline of
contracts. These factors raise significant doubt about the ability of the
Company to continue as a going concern.
  4
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      1-
              ORGANIZATION AND BASIS
      OF PRESENTATION (CONTINUED)
  Going Concern
(Continued)
  Management’s
plans to address these conditions include continued efforts to obtain government
contracts as well as commercial contracts through expanding sources and new
technology, and the raising of additional capital through the sale of the
Company’s stock. Additionally, the Company has commenced plan’s to reduce their
liabilities by conversion of the notes payable and underlying warrants into
shares of common stock. The Company has only had discussions up to this point
other than the $169,500 they have converted in 2008.
  The
Company’s long-term success is dependent upon the obtaining of sufficient
capital to fund its operations; development of its products; and launching its
products to the worldwide market. These factors will contribute to the Company’s
obtaining sufficient sales volume to be profitable. To achieve these objectives,
the Company may be required to raise additional capital through public or
private financings or other arrangements.
  It cannot
be assured that such financings will be available on terms attractive to the
Company, if at all. Such financings may be dilutive to existing stockholders and
may contain restrictive covenants.
  The
Company is subject to certain risks common to technology-based companies in
similar stages of development. Principal risks to the Company include
uncertainty of growth in market acceptance for its products; history of losses
in recent years; ability to remain competitive in response to new technologies;
costs to defend, as well as risks of losing patent and intellectual property
rights; reliance on limited number of suppliers; reliance on outsourced
manufacture of its products for quality control and product availability;
uncertainty of demand for its products in certain markets; ability to manage
growth effectively; dependence on key members of its management; and its ability
to obtain adequate capital to fund future operations.
  The
condensed consolidated financial statements do not include any adjustments
relating to the carrying amounts of recorded assets or the carrying amounts and
classification of recorded liabilities that may be required should the Company
be unable to continue as a going concern.
  NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
  Principles of
Consolidation
  The
condensed consolidated financial statements include those of the Company and its
wholly-owned subsidiary. All intercompany accounts and transactions have been
eliminated in consolidation.
  Use of
Estimates
  The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
  Cash and Cash
Equivalents
  The
Company considers all highly liquid debt instruments and other short-term
investments with a maturity of three months or less, when purchased, to be cash
equivalents.
  The
Company maintains cash and cash equivalent balances at one financial institution
that is insured by the Federal Deposit Insurance Corporation.
 
  Allowance for Doubtful
Accounts
  The
Company provides an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection information.
Credit is granted to substantially all customers on an unsecured basis. In
determining the amount of the allowance, management is required to make certain
estimates and assumptions. Management has determined that as of March 31, 2009,
an allowance of $2,364 is required.
  5
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Fixed
Assets
  Fixed
assets are stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets (primarily three to five years). Costs of maintenance and repairs
are charged to expense as incurred.
  Computer Software
Development Costs
  During
2008, the Company capitalized certain software development costs. The Company
capitalizes the cost of software in accordance with SFAS 86 once technological
feasibility has been demonstrated, as the Company has in the past sold, leased
or otherwise marketed their software, and plans on doing so in the future. The
Company capitalizes costs incurred to develop and market their privacy
preserving software during the development process, including payroll costs for
employees who are directly associated with the development process and services
performed by consultants. Amortization of such costs is based on the greater of
(1) the ratio of current gross revenues to the sum of current and anticipated
gross revenues, or (2) the straight-line method over the remaining economic life
of the software, typically five years. It is possible that those anticipated
gross revenues, the remaining economic life of the products, or both, may be
reduced as a result of future events. The Company has not developed any software
for internal use. The Company commencing January 1, 2008, placed an additional
$226,084 of software development from prior years into service, which is being
amortized over a three year period.
  For the
three months ended March 31, 2009 and 2008, the Company recognized $18,840 and
$63,091 of amortization expense on its capitalized software costs,
respectively.
  Recoverability of Long-Lived
Assets
  The
Company reviews the recoverability of its long-lived assets on a periodic basis
whenever events and changes in circumstances have occurred which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company’s ability to recover the carrying value of its long-lived assets
from expected future cash flows from its operations on an undiscounted basis. If
such assets are determined to be impaired, the impairment recognized is the
amount by which the carrying value of the assets exceeds the fair value of the
assets. Fixed assets to be disposed of by sale are carried at the lower of the
then current carrying value or fair value less estimated costs to
sell.
  Revenue
Recognition
  The
Company generates revenue from professional services rendered to customers as
well as from application management support contracts with governmental units.
The Company’s revenue is generated under time-and-material contracts and
fixed-price contracts.
  Time-and-Material
Contracts
  Time-and-material
contracts revenue is generated whereby costs are generally incurred in
proportion with contracted billing schedules and revenue is recognized as
services are performed, with the corresponding cost of providing those services
reflected as direct costs. The customers are billed in accordance with the
contracts entered into. Such method is expected to result in reasonably
consistent profit margins over the contract term.
  Fixed-Price
Contracts
  Revenue
from firm-fixed-price contracts is recognized upon achievement of the milestones
contained in the contracts in accordance with the provisions of Staff Accounting
Bulletin 104. Revenue is not recognized until collectibility is assured, which
does not take place until completion of the particular milestone. Costs are
recognized as services are performed.
  The
Company does not derive revenue from projects involving multiple
revenue-generating activities. If a contract would involve the provision of
multiple service elements, total estimated contract revenue would be allocated
to each element based on the fair value of each element. The amount of revenue
allocated to each element would then be limited to the amount that is not
contingent upon the delivery of another element in the future. Revenue for each
element would then be recognized depending upon whether the contract is a
time-and-materials contract or a fixed-price, fixed-time
contract.
  6
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Stock-Based
Compensation
  On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”).  SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans.  The provisions of SFAS
123R, as amended, are effective for small business issuers beginning as of the
next interim period after December 15, 2005.  The Company has adopted
these provisions as of January 1, 2006 and this adoption did not have a material
effect on the Company’s operations.
  On
January 1, 2006, the Company adopted the provisions of FAS No. 123R “Share-Based
Payment” (“FAS 123R”) which requires recognition of stock-based compensation
expense for all share-based payments based on fair value. Prior to January 1,
2006, the Company measured compensation expense for all of its share-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) and related interpretations. The Company has provided pro
forma disclosure amounts in accordance with FAS No. 148, “Accounting for
Stock-Based Compensation – Transition and Disclosure – an amendment of FASB
Statement No. 123” (“FAS 148”), as if the fair value method defined by FAS No.
123, “Accounting for Stock Based Compensation” (“FAS 123”) had been applied to
its stock-based compensation.
 
 The
Company has elected to use the modified–prospective approach method. Under that
transition method, the calculated expense in 2006 is equivalent to compensation
expense for all awards granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair values estimated in accordance with the
original provisions of FAS 123. Stock-based compensation expense for all awards
granted after January 1, 2006 is based on the grant-date fair values estimated
in accordance with the provisions of FAS 123R. The Company recognizes these
compensation costs, net of an estimated forfeiture rate, on a pro rata basis
over the requisite service period of each vesting tranche of each award. The
Company considers voluntary termination behavior as well as trends of actual
option forfeitures when estimating the forfeiture rate.
  The
Company’s options issued in January and December 2008 were considered stock
based compensation (see Note 7).
  Concentrations
  The
Company has derived all of its revenue for the three months ended March 31, 2008
from one customer.
  Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. To date, accounts
receivable have been derived from contracts with agencies of the federal
government. Accounts receivable are generally due within 30 days and no
collateral is required.
  Segment
Reporting
  The
Company follows the provisions of SFAS 131, “Disclosures about Segments of an
Enterprise and Related Information.” This standard requires that companies
disclose operating segments based on the manner in which management
disaggregates the Company in making internal operating decisions. The Company
believes that there is only one operating segment.
  7
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Fair Value of Financial
Instruments (other than Derivative Financial Instruments)
 
 The
carrying amounts reported in the condensed consolidated balance sheet for cash
and cash equivalents, and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments.  For
the notes payable, the carrying amount reported is based upon the incremental
borrowing rates otherwise available to the Company for similar
borrowings.
  Convertible
Instruments
  The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features, where the ability
to physical or net-share settle the conversion option is not within the control
of the Company, are bifurcated and accounted for as a derivative financial
instrument. Bifurcation of the embedded derivative instrument requires
allocation of the proceeds first to the fair value of the embedded derivative
instrument with the residual allocated to the debt instrument. The resulting
discount to the face value of the debt instrument is amortized through periodic
charges to interest expense using the Effective Interest Method.
  Income
Taxes
  Under
Financial Accounting Standards Board Statement No. 109, “Accounting for Income
Taxes,” the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
  Uncertainty in Income
Taxes
  In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for
Uncertainty in Income Taxes.” This interpretation requires recognition and
measurement of uncertain income tax positions using a “more-likely-than-not”
approach. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. Management has adopted FIN 48 for 2007, and they evaluate their tax
positions on an annual basis, and have determined that as of March 31, 2009, no
additional accrual for income taxes is necessary.
  (Loss) Per Share of Common
Stock
  Basic net
(loss) per common share (“EPS”) is computed using the weighted average number of
common shares outstanding for the period. Diluted earnings per share includes
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants. Common stock equivalents
are not included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be anti-dilutive for the periods
presented.
  8
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
  NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  (Loss) Per Share of Common
Stock (Continued)
  The
following is a reconciliation of the computation for basic and diluted
EPS:
  Three Months EndedMarch 31,
                    
                    
                    March 31,2009
                    
                    
                    2008Net
      (loss)
                    
                    $
                    (207,639
                    )
                    
                    $
                    (622,757
                    )Weighted-average
      common shares outstanding :Basic
                    
                    
                    17,738,510
                    
                    
                    
                    11,472,188Convertible
      Notes
                    
                    
                    18,900,000
                    
                    
                    
                    -Warrants
                    
                    
                    20,408,784
                    
                    
                    
                    4,908,784Options
                    
                    
                    2,015,000
                    
                    
                    
                    370,000Diluted
                    
                    
                    59,062,294
                    
                    
                    
                    16,750,972Basic
      net (loss) per share
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.05
                    )Diluted
      net (loss) per share
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.05
                    )
  Research and
Development
  Research
and development costs are expensed as incurred. In addition, research and
development costs have been included in the condensed consolidated statements of
operations for the three months ended March 31, 2009 and 2008,
respectively.
  Recent Issued Accounting
Standards
  In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.”
This standard defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosure about
fair value measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of SFAS 157 has not had a material impact on the
consolidated financial statements.
  In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115”, (“FAS 159”) which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates. A
business entity is required to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is expected to expand the use of fair value
measurement. FAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.
  In
December 2006, the FASB Staff issued FSP EITF - 00-19-2, “Accounting for Registration Payment
Arrangements” (“EITF
00-19-2”). EITF 00-19-2 addresses an issuer’s accounting for registration
payment arrangements. EITF 00-19-2 specifies that the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies. EITF 00-19-2 is effective for financial statements issued for
fiscal years beginning after December 15, 2006, and interim periods within those
fiscal years. Application of EITF 00-19-02 resulted in an adjustment in January
2007 reclassifying the derivative liability to additional paid-in capital and
retained earnings. The adjustment reduced the derivative liability by $1,031,703
and increased additional paid-in capital by $547,086 and increased retained
earnings by $484,617 which was the cumulative-effect adjustment resulting from
the adoption of this standard.
  9
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
  NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Recent Issued Accounting
Standards (Continued)
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, changes in a parent’s ownership of a noncontrolling interest,
calculation and disclosure of the consolidated net income attributable to the
parent and the noncontrolling interest, changes in a parent’s ownership interest
while the parent retains its controlling financial interest and fair value
measurement of any retained noncontrolling equity investment. SFAS 160 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. Management does not believe that the adoption of SFAS No. 160 has
had an impact on the Company’s consolidated financial position, results of
operations or cash flows.
 
 In
December 2007, the FASB issued SFAS 141R,Business Combinations (“SFAS 141R”), which replaces
FASB SFAS 141,Business
Combinations. This Statement retains the fundamental requirements in SFAS
141 that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination.
SFAS 141R defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control.  SFAS 141R will require
an entity to record separately from the business combination the direct costs,
where previously these costs were included in the total allocated cost of the
acquisition.  SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date.  This
compares to the cost allocation method previously required by SFAS No.
141.
 
 SFAS 141R
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met.  Finally, SFAS 141R will require an entity to
recognize contingent consideration at the date of acquisition, based on the fair
value at that date.  This Statement will be effective for business
combinations completed on or after the first annual reporting period beginning
on or after December 15, 2008.  Early adoption of this standard is not
permitted and the standards are to be applied prospectively
only.  Upon adoption of this standard, there would be no impact to the
Company’s results of operations and financial condition for acquisitions
previously completed.  The adoption of SFAS No. 141R has not had a
material effect on the Company’s consolidated financial position, results of
operations or cash flows.
 
 In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expenses
the current view of the staff that it will accept a company’s election to use
the simplified method discussed in Staff Accounting Bulletin No. 107, “Share Based Payment”, (“SAB 107”), for estimating
the expected term of “plain
vanilla” share options regardless of whether the company has sufficient
information to make more refined estimates. SAB 110 became effective for the
Company on January 1, 2008. The adoption of SAB 110 has not had a material
impact on the Company’s financial position.
 
 In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. The Company was required to adopt FSP 142-3 on October 1, 2008. The
guidance in FSP 142-3 for determining the useful life of a recognized intangible
asset shall be applied prospectively to intangible assets acquired after
adoption, and the disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, adoption. The Company
does not believe FSP 142-3 will materially impact their financial position,
results of operations or cash flows.
  10
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Recent Issued Accounting
Standards (Continued)
  In May
2008, the FASB issued FSP Accounting Principles Board 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not believe that the adoption of FSP APB 14-1 will have
a material effect on its financial position, results of operations or cash
flows.
 
 In June
2008, the Emerging Issues Task Force issued EITF No. 07-05, “Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF
07-05”), which supersedes the definition in EITF 06-01 for periods beginning
after December 15, 2008. The objective of EITF 07-05 is to provide guidance for
determining whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity’s own stock and it applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative
in FSAB 133, for purposes of determining whether that instrument or embedded
feature qualifies for the first part of the scope exception in paragraph 11(a)
of SFAS 133 (“the Paragraph 11(a) Exception”). EITF 07-05 also applies to any
freestanding financial instrument that is potentially settled in an entity’s own
stock, regardless of whether the instrument s within the scope of EITF 00-19.
The Company is determining what impact, if any, EITF 07-05 will have on its
financial position, results of operations and cash flows.
 
 In June
2008, the Emerging Issues Task Force issued EITF 08-04, “Transition Guidance for
Conforming Changes to EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”
(“EITF 08-04”). EITF 08-04 is effective for years ending after December 15,
2008. The overall objective of EITF 08-04 is to conform the requirements of EITF
00-27 and FASB 150 with EITF 98-5 to provide for consistency in application of
the standard. The Company has computed and recorded a beneficial conversion
feature in connection with certain of their prior financing arrangements and
does not believe that EITF 08-04 will have a material effect on that
accounting.
 
 Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the condensed consolidated
financial statements upon adoption.
  NOTE
      3-
              FIXED
      ASSETS
  Fixed
assets consist of the following as of March 31, 2009 (unaudited) and December
31, 2008, respectively:
  Estimated Useful
                      
                      
                      March 31,
                      
                      
                      December 31,Lives(Years)
                      
                      
                      2009
                      
                      
                      2008Computer
      equipment
                      
                      
                      5
                      
                      
                      $
                      107,065
                      
                      
                      $
                      107,065Office
      machinery and equipment
                      
                      
                      3
                      
                      
                      
                      15,638
                      
                      
                      
                      15,638Furniture  and
      fixtures
                      
                      
                      5
                      
                      
                      
                      538
                      
                      
                      
                      538Automobile
                      
                      
                      5
                      
                      
                      
                      58,476
                      
                      
                      
                      58,476181,717
                      
                      
                      
                      181,717Less:
      Accumulated depreciation
                      
                      
                      
                      
                      
                      
                      (152,614
                      )
                      
                      
                      (150,138
                      )Total,
      net
                      
                      
                      
                      
                      
                      $
                      29,103
                      
                      
                      $
                      31,579
  Depreciation
expense was $2,475 and $5,498 for the three months ended March 31, 2009 and
2008, respectively.
  11
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      4-
              COMPUTER SOFTWARE
      DEVELOPMENT COSTS
  Computer
software development costs consist of the following as of March 31, 2009
(unaudited) and December 31, 2008, respectively:
  Estimated Useful
                    
                    
                    March 31,
                    
                    
                    December 31,Lives(Years)
                    
                    
                    2009
                    
                    
                    2008Computer
      software development costs
                    
                    
                    5
                    
                    
                    $
                    986,724
                    
                    
                    $
                    986,724Less:
      Accumulated amortization
                    
                    
                    
                    
                    
                    
                    (865,315
                    )
                    
                    
                    (846,475
                    )Total,
      net
                    
                    
                    
                    
                    
                    $
                    121,409
                    
                    
                    $
                    140,249
  Amortization
expense was $18,840 and $63,091 for the three months ended March 31, 2009 and
2008, respectively.
  Amortization
expense anticipated through December 31, 2010 is as follows:
  Period
      ended December 31:2009
                      
                      $
                      70,1252010
                      
                      
                      51,284$
                      121,409
  NOTE
      5-
              NOTES
      PAYABLE
  SBA
Loan
  On July
22, 2003, the Company and the U.S. Small Business Administration (“SBA”) entered
into a Note (the “Note”) under the SBA’s Secured Disaster Loan program in the
amount of $377,100.
  Under the
Note, the Company agreed to pay principal and interest at an annual rate of 4%
per annum, of $1,868 every month commencing twenty-five (25) months from the
date of the Note (commencing August 2005). The Note matures July
2033.
  The
Company must comply with the default provisions contained in the Note. The
Company is in default under the Note if it does not make a payment under the
Note, or if it: a) fails to comply with any provision of the Note, the Loan
Authorization and Agreement, or other Loan documents; b) defaults on any other
SBA loan; c) sells or otherwise transfers, or does not preserve or account to
SBA’s satisfaction for, any of the collateral (as defined therein) or its
proceeds; d) does not disclose, or anyone acting on their behalf does not
disclose, any material fact to the SBA; e) makes, or anyone acting on their
behalf makes, a materially false or misleading representation to the SBA; f)
defaults on any loan or agreement with another creditor, if the SBA believes the
default may materially affect the Company’s ability to pay this Note; g) fails
to pay any taxes when due; h) becomes the subject of a proceeding under any
bankruptcy or insolvency law; i) has a receiver or liquidator appointed for any
part of their business or property; j) makes an assignment for the benefit of
creditors; k) has any adverse change in financial condition or business
operation that the SBA believes may materially affect the Company’s ability to
pay this Note; l) dies; m) reorganizes, merges, consolidates, or otherwise
changes ownership or business structure without the SBA’s prior written consent;
or n) becomes the subject of a civil or criminal action that the SBA believes
may materially affect the Company’s ability to pay this Note. The Company is
currently in default of this note as they have not made a payment since October
29, 2008. As a result, the Company previously classified all of the principal
remaining on this note as a current liability, and has since received a waiver
from the SBA in the first quarter of 2009 for the default and has now classified
the current portion and long-term portion of this note in the condensed
consolidated balance sheet at March 31, 2009.
  12
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
  NOTE
      5-
              NOTES PAYABLE
      (CONTINUED)
  SBA
Loan (Continued)
  As of
March 31, 2009, the Company has an outstanding principal balance of $354,936.
Interest expense on the SBA loan for the three months ended March 31, 2009 and
2008 were $900 and $3,148, respectively.
  Automobile
Loan
  The
Company has a note payable with an automotive finance company in the original
amount of $44,990 (the “Auto Note”). The Auto Note commenced in November 2003,
and requires payments of $750 per month for a period of 60 months. The Auto Note
is secured by the automobile.
  As of
March 31, 2009, the note has matured.
  Convertible
Notes
 
 The
Company has entered into the following convertible notes:
 
 ·
              Convertible
      note dated March 6, 2008 in the amount of $75,000, with a term of 2 years,
      with interest calculated at 9.9% per annum. The note is convertible at 50%
      of the closing bid price of the common stock on the date of conversion.
      The Company has accrued interest for the period ended December 31, 2008
      and three months ended March 31, 2009 in the amount of $7,634. In
      accordance with EITF 98-5 and EITF 00-27, the Company recorded a
      beneficial conversion feature of $75,000 based on the difference in the
      intrinsic value of the conversion option. As of March 31, 2009, $7,000 was
      converted for 4,207,618 shares of common
stock;
 
 ·
              Convertible
      note dated March 7, 2008 in the amount of $62,500, with a term of 2 years,
      with interest calculated at 9.9% per annum. The note was convertible at
      50% of the closing bid price of the common stock on the date of
      conversion, and was converted the same day the note was executed for a
      conversion price of $.135 or 462,963 shares. This note was converted
      immediately and the shares were issued in April 2008, and there was no
      beneficial conversion feature associated with this
  note;
  ·
              Convertible
      note dated March 10, 2008 in the amount of $100,000, with a term of 2
      years, with interest calculated at 9.9% per annum. The note was
      convertible at 50% of the closing bid price of the common stock on the
      date of conversion, and was converted the same day the note was executed
      for a conversion price of $.135 or 740,741 shares. This note was converted
      immediately and shares were issued in April 2008 and there was no
      beneficial conversion feature associated to this
  note.
 
 ·
              Convertible
      note dated June 1, 2008 in the amount of $25,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $0.02 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $0.02 per share for 1,250,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of March 31, 2009 in the amount of
      $1,438;
 
 ·
              Convertible
      note dated June 21, 2008 in the amount of $10,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $0.02 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $0.02 per share for 500,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of March 31, 2009 in the amount of
      $770;
  13
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
  NOTE
      5-
              NOTE PAYABLE
      (CONTINUED)
  Convertible Notes(continued)
 
 ·
              Convertible
      note dated June 21, 2008 in the amount of $10,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $0.02 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $0.02 per share for 500,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of March 31, 2009 in the amount of
      $770;
  ·
              Convertible
      note dated July 2, 2008 in the amount of $5,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $.020 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $.02 per share for 250,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of March 31, 2009 in the amount of
      $370;
 
 ·
              Convertible
      notes dated between July 23, 2008 and August 6, 2008 in the amount of
      $250,000, with a term of 2 years, with interest calculated at 10% per
      annum. The notes are convertible into a fixed price of $.02 per share of
      common stock on the outstanding principal and accrued interest on the date
      of conversion. The note holder also received a warrant agreement
      exercisable over five years to purchase common stock at $.02 per share for
      12,500,000 warrants. There will also be warrants issued for accrued
      interest should the interest be converted. The Company has accrued
      interest as of March 31, 2009 in the amount of $16,900;
  and
 
 ·
              Convertible
      note dated November 16, 2008 in the amount of $10,000, with a term of 2
      years, with interest calculated at 10% per annum. The note is convertible
      into a fixed price of $.02 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $.02 per share for 500,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of March 31, 2009 in the amount of
      $367.
  The
convertible notes issued in June, July, August and November 2008, were issued
with warrants and each instrument was valued according to the provisions of APB
14. The value of the warrants are reflected as additional paid in capital with a
value of $230,079, with a corresponding debt discount in the same amount. The
discount is being amortized over the life of the convertible notes of 1 to 2
years. Amortization of the discount for the three months ended March 31, 2009
and 2008 is $31,317 and $0, respectively, with a remaining debt discount as of
March 31, 2009 of $142,801. In addition, the Company calculated a beneficial
conversion feature of $1,091,253 on the $385,000 in convertible notes in
accordance with the provisions of EITF 98-5 and EITF 00-27.
  As of
March 31, 2009, the repayment schedule of the Notes Payable for the next two
years and in the aggregate is:
  2010
      (net of discount of $3,410)
                    
                    $
                    124,5902011
      (net of discount of $139,391)
                    
                    
                    453,369577,959Less:
      current portion
                    
                    
                    (124,590
                    )Long-term
      portion
                    
                    $
                    453,369
  14
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
  NOTE
      6-
              STOCKHOLDERS’ EQUITY
      (DEFICIT)
  Preferred
Stock
  The
Company was incorporated on May 26, 2005, and the Board of Directors authorized
10,000,000 shares of preferred stock with a par value of $0.0001. The Company
has not issued any shares of preferred stock since inception.
  Common
Stock
  The
Company was incorporated on May 26, 2005, and the Board of Directors authorized
75,000,000 shares of common stock with a par value of $0.0001.
  The
Company as of March 31, 2009 has 17,738,510 shares of common stock issued and
outstanding.
 
 During
the three months ended March 31, 2009 the Company issued no shares of common
stock. The Company also raised $20,000 during the three months ended March 31,
2009, for shares of common stock, but these shares have not been issued as of
March 31, 2009. During the year ended December 31, 2008 the Company issued
462,963 and 740,741 shares of common stock in convertible note transactions of
$62,500 and $100,000, respectively (see Note 5).  These shares of
stock were issued in April 2008. Additionally, 4,207,618 shares of common stock
were issued to convert $7,000 of a convertible note payable.
 
 The
Company issued 475,000 shares of common stock to three convertible note holders
valued at $64,125 for entering into the March 6, 7 and 10 convertible note
agreements.  The Company also issued 350,000 shares of common stock
for services rendered valued at $52,500. The combined $116,625 is reflected as
stock issued for services in the consolidated statements of operations for the
year ended December 31, 2007.  These shares of stock were issued in
April 2008.
  The
Company has also recorded a $15,000 consulting fee in 2007 for the issuance of
30,000 shares of stock. The fees were earned in 2007 and the shares of stock
were issued in April 2008.
 
 Warrants
  The
Company in the private placement granted 2,329,392 Class A and 2,329,392 Class B
warrants. In April 2007, 1,629,513 of the Class A warrants were exercised into
common shares. In November 2007, an additional 444,879 of the Class A warrants
were exercised into common shares. The Company granted additional Class A
warrants to the warrant holders that exercised during April and November 2007.
The additional Class A warrants of 2,074,392 were issued in November 2007 and
are reflected herein. The Company also issued 250,000 warrants in September 2007
for investor relation services and 2,250,000 warrants in connection with the
convertible notes issued in June 2008, 250,000 warrants in connection with the
notes issued in July 2008, 12,500,000 warrants in connection with the notes
issued in July and August 2008, and 500,000 warrants in connection with the note
issued in November 2008. The following is a breakdown of the
warrants:
  Exercise
                          
                          DateWarrants
                          
                          Price
                          
                          Issued
                          
                          Term255,000
                          
                          $
                          0.50
                          
                          4/1/2007
                          
                          5
      years2,329,392
                          
                          $
                          0.50
                          
                          4/1/2007
                          
                          5
      years250,000
                          
                          $
                          0.50
                          
                          9/1/2007
                          
                          5
      years2,074,392
                          
                          $
                          0.50
                          
                          11/30/2007
                          
                          3.9
      years2,250,000
                          
                          $
                          0.02
                          
                          6/1/2008
                          
                          5
      years250,000
                          
                          $
                          0.02
                          
                          7/2/2008
                          
                          5
      years12,500,000
                          
                          $
                          0.02
                          
                          7/31/08-8/6/08
                          
                          5
      years500,000
                          
                          $
                          0.02
                          
                          11/16/2008
                          
                          5
      years20,408,784
 
 The
warrants have a weighted average price of $.12.
  15
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      6-
              STOCKHOLDERS’ EQUITY
      (DEFICIT) (CONTINUED)
  The Class
A Warrants and Class B Warrants in the private placement as well as the
consultant warrants were valued utilizing the Black – Scholes method as
follows:
 
 Class A
                      
                      
                      Class B
                      
                      
                      Consultant
                      
                      
                      Conv NotesStock
      Price
                      
                      $
                      .50
                      
                      
                      $
                      .50
                      
                      
                      $
                      .50
                      
                      
                      $
                      .10Strike
      Price
                      
                      $
                      .50
                      
                      
                      $
                      .62
                      
                      
                      $
                      .50
                      
                      
                      $
                      .02Expected
      Life of Warrant
                      
                      5
      yrs.
                      
                      
                      5
      yrs.
                      
                      
                      5
      yrs.
                      
                      
                      5
      yrs.Annualized
      Volatility
                      
                      
                      50
                      %
                      
                      
                      50
                      %
                      
                      
                      50
                      %
                      
                      
                      100
                      %Discount
      Rate
                      
                      
                      3.50
                      %
                      
                      
                      3.50
                      %
                      
                      
                      3.50
                      %
                      
                      
                      3.00
                      %Annual
      Rate of Quarterly Dividends
                      
                      None
                      
                      
                      None
                      
                      
                      None
                      
                      
                      NoneCall
      Option Value
                      
                      $
                      .237
                      
                      
                      $
                      .206
                      
                      
                      $
                      .378
                      
                      
                      $
                      .0834/$.0908
  Options
  Prior to
October 2007, there were no options outstanding, or granted. In October 2007,
the Company’s Board of Directors and Shareholders approved the adoption of an
option plan for a total of 2,200,000 shares and issued 440,000 options in
October 2007 and 2,000,000 in December 2008 that vest over a three-year period
of time with a strike price of $0.50 per share (October 2007/January 2008) and
$.01 (December 2008). 425,000 of these options were forfeited during 2008. The
Company has 2,015,000 options remaining at March 31, 2009, all of which are
fully vested.
  These
options were valued as follows:
  January 2008Stock Price
                          
                          
                          $
                          0.03/$0.55Strike
      Price
                          
                          
                          $
                          .50Expected
      Life of Option
                          
                          
                          1
      yr.Annualized
      Volatility
                          
                          
                          
                          100
                          %Discount
      Rate
                          
                          
                          
                          3.00
                          %Annual
      Rate of Quarterly Dividends
                          
                          
                          NoneCall
      Option Value
                          
                          
                          $
                          .124/$.217
  December 2008Stock Price
                    
                    $
                    0.01Strike
      Price
                    
                    $
                    0.01Expected
      Life of Option
                    
                    5
      yr.Annualized
      Volatility
                    
                    
                    100
                    %Discount
      Rate
                    
                    
                    3.00
                    %Annual
      Rate of Quarterly Dividends
                    
                    NoneCall
      Option Value
                    
                    $
                    .0076
 
 The value
attributable to these options for the three months ended March 31, 2009 and 2008
is $0 and $33,232 respectively and is reflected in the condensed consolidated
statements of operations as stock based compensation.
  16
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
  NOTE
      7-
              COMMITMENTS
  Rental
  The
Company leased office space under an operating lease that expired in November
2008. The Company currently leases space on a month-to-month basis.
  Rent
expense for the three months ended March 31, 2009 and 2008 was $500 and $27,663,
respectively.
  Consulting
Agreements
  During
the three months ended March 31, 2009 and 2008, the Company did not enter into
any consulting agreements. In 2007, the Company entered into consulting
agreements with marketing and strategic consulting groups with terms that do not
exceed one year. These companies are to be paid fees for the services they
perform. The Company has included these fees in their condensed consolidated
statements of operations for the three months ended March 31, 2008.
 
 NOTE
      8-
              PROVISION FOR INCOME
      TAXES
  Deferred
income taxes will be determined using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company’s assets and liabilities.  Deferred income taxes are measured
based on the tax rates expected to be in effect when the temporary differences
are included in the Company’s tax return.  Deferred tax assets and
liabilities are recognized based on anticipated future tax consequences
attributable to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases.
  At March
31, 2009, deferred tax assets consist of the following:
 Net
      operating losses
                    
                    $
                    1,964,860Valuation
      allowance
                    
                    
                    (1,964,860
                    )$
                    -
 
 At March
31, 2009, the Company had net operating loss carryforward in the approximate
amount of $5,779,001, available to offset future taxable income through
2029.  The Company established valuation allowances equal to the full
amount of the deferred tax assets due to the uncertainty of the utilization of
the operating losses in future periods.
  A
reconciliation of the Company’s effective tax rate as a percentage of income
before taxes and federal statutory rate for the three months ended March 31,
2009 and 2008 is summarized below.
  2009
                    
                    
                    2008Federal
      statutory rate
                    
                    
                    (34.0
                    )%
                    
                    
                    (34.0
                    )%State
      income taxes, net of federal benefits
                    
                    
                    6.0
                    
                    
                    
                    6.0Valuation
      allowance
                    
                    
                    28.0
                    
                    
                    
                    28.00
                    %
                    
                    
                    0
                    %
  17
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 MARCH
31, 2009 AND 2008 (UNAUDITED)
  NOTE
9-          DEFINED CONTRIBUTION
PLAN
  The
Company has a retirement plan which satisfies the requirements of Section 401(k)
of the Internal Revenue Code. This defined contribution retirement plan covers
substantially all employees. Participants can elect to have up to the maximum
percentage allowable of their salaries reduced and contributed to the plan. The
Company may make matching contributions equal to a discretionary percentage of
the participants’ elective deferrals. The Company made no such contributions for
the three months ended March 31, 2009 and 2008, respectively.
  NOTE
10-        MAJOR
CUSTOMER
  The
Company’s contracts with agencies of the federal government accounted for 100%
of its revenue and accounts receivable as of and for the three months ended
March 31, 2009 (accounts receivable only) and 2008, respectively.
  NOTE
11-        FAIR VALUE
MEASUREMENTS
  On
January 1, 2008, the Company adopted SFAS 157. SFAS 157 defines fair value,
provides a consistent framework for measuring fair value under generally
accepted accounting principles and expands fair value financial statement
disclosure requirements. SFAS 157’s valuation techniques are based on observable
and unobservable inputs. Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect our market assumptions.
SFAS 157 classifies these inputs into the following hierarchy:
  Level 1
inputs: Quoted prices for identical instruments in active markets.
  Level 2
inputs: Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
  Level 3
inputs: Instruments with primarily unobservable value drivers.
  The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of March 31,
2009:
  Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    TotalCash
                    
                    
                    107
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    107Total
      assets
                    
                    
                    107
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    107Notes
      payable, net of discount
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    577,959
                    
                    
                    
                    577,959Total
      liabilities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    577,959
                    
                    
                    
                    577,959
  18




NOTE
12-        PENDING
ACQUISITION




On March
16, 2009, the Company entered into an agreement and plan of reorganization (the
“Merger Agreement”) with the Irus Group, Inc. under which it intends to effect a
reverse triangular merger between The Irus Group, Inc. and the Company’s
wholly-owned subsidiary, Irus Acquisition Corp. (formed for the purse of
completing this transaction). The Merger Agreement was then amended on June 15,
2009 (the “First Amended and Restated Agreement”) to reflect the change in the
amount of the issued shares to Irus in the transaction.




Under the
terms of the First Amended and Restated Agreement, the issued and outstanding
shares of The Irus Group common stock will be automatically converted into the
right to receive 56% of the issued and outstanding shares of the Company’s
common stock.




The
Merger Agreement also provides that, at the effective time of the Merger, the
Company’s Board of Directors agrees to appoint Vijay Suri, President and CEO of
the Company and have Vijay Suri fill a vacancy on its Board of Directors. In
addition, effectiveness of the Merger Agreement is conditional upon (i) the
Company restructuring existing debt by converting the existing debt and warrants
to common stock with the intention of having no more than 57-60 million shares
of its common stock outstanding prior to a reverse split of not less than 1:10;
(ii) the Company using its best efforts to reduce its accounts payable by 70%,
(iii) Vijay Suri, President and CEO of The Irus Group, Inc. executing an
employment agreement with the Company, and (iv) additional customary closing
conditions relating to delivery of financial statements, closing certificates as
to representations and warranties, and the delivery of any required consents or
government approvals. The Merger is expected to be completed by July 31,
2009.




19


Item
2.    Management’s Discussion and Analysis or Plan of
Operation.




The
information set forth and discussed in this Management’s Discussion and Analysis
or Plan of Operation is derived from our financial statements and the
related notes, which are included. The following information and discussion
should be read in conjunction with those financial statements and notes, as
well as the information provided in our Annual Report on Form 10-K for our
fiscal year ended December 31, 2008.





Overview





Our
company was formed in May 2005 to pursue a business combination. On October 24,
2006, we acquired InferX Corporation, a Virginia corporation (“InferX
Virginia”), and on October 27, 2006 we merged InferX Virginia into our company
and changed our name to “InferX Corporation.” After the acquisition of InferX
Virginia, we succeeded to its business as our sole line of business. InferX
Virginia was formed in August 2006 by the merger of the former InferX
Corporation, a Delaware corporation (“InferX Delaware”), with and into Datamat
Systems Research, Inc., a Virginia corporation and an affiliate of InferX
Delaware (“Datamat”), pursuant to which Datamat was the surviving corporation
and changed its name to “InferX Corporation.”




Datamat
was formed in 1992 as a professional services research and development firm,
specializing in technology for distributed analysis of sensory data relating to
airborne missile threats under contracts with the Missile Defense Agency and
other DoD contracts.  InferX Delaware was formed in 1999 to
commercialize Datamat’s missile defense technology to build applications of real
time predictive analytics. The original technology was developed in part with
grants by the Missile Defense Agency.




Historically,
we have derived nearly all of our sales revenues under federal government
contracts. Under these contracts, we performed research and development that
enabled us to retain ownership of the intellectual property, which led to the
creation of our current products. Due to the relatively small and uncertain
margins associated with fixed price government contracts and the inherent limit
of the market size, in fiscal 2002 we began to develop our software as a
commercial product, concentrating on building specific applications that we
believed would meet the needs of potential new customers. In fiscal 2003, we
sold two commercial licenses. However, since fiscal 2004, all of our revenues
have derived from government contracts. Currently, we have one contract with the
Missile Defense Agency to develop a prototype application of our
software.




Critical
Accounting Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. We rely on historical experience and on other assumptions
we believe to be reasonable under the circumstances in making our judgments and
estimates. Actual results could differ from those estimates. We consider our
critical accounting policies to be those that are complex and those that require
significant judgments and estimates, including the following: recognition of
revenue, capitalization of software development costs and income
taxes.




Principles
of Consolidation




The
consolidated financial statements include those of InferX and our wholly-owned
subsidiary. All intercompany accounts and transactions have been eliminated in
consolidation.




Use
of Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.


20





Cash
and Cash Equivalents




We
consider all highly liquid debt instruments and other short-term investments
with a maturity of three months or less, when purchased, to be cash
equivalents.




We
maintain cash and cash equivalent balances at one financial institution that is
insured by the Federal Deposit Insurance Corporation up to
$100,000.




Allowance
for Doubtful Accounts




We
provide an allowance for doubtful accounts, which is based upon a review of
outstanding receivables as well as historical collection information. Credit is
granted to substantially all customers on an unsecured basis. In determining the
amount of the allowance, management is required to make certain estimates and
assumptions.




Fixed
Assets




Fixed
assets are stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets (primarily three to five years). Costs of maintenance and repairs
are charged to expense as incurred.




Computer
Software Development Costs




During
2008 and 2006, we capitalized certain software development costs. We capitalize
the cost of software in accordance with SFAS 86 once technological feasibility
has been demonstrated, as we have in the past sold, leased or otherwise marketed
our software, and plans on doing so in the future. We capitalize costs incurred
to develop and market our privacy preserving software during the development
process, including payroll costs for employees who are directly associated with
the development process and services performed by consultants. Amortization of
such costs is based on the greater of (1) the ratio of current gross revenues to
the sum of current and anticipated gross revenues, or (2) the straight-line
method over the remaining economic life of the software, typically five years.
It is possible that those anticipated gross revenues, the remaining economic
life of the products, or both, may be reduced as a result of future events. We
have not developed any software for internal use.





Recoverability
of Long-Lived Assets




We review
the recoverability of our long-lived assets on a periodic basis whenever events
and changes in circumstances have occurred which may indicate a possible
impairment. The assessment for potential impairment is based primarily on our
ability to recover the carrying value of long-lived assets from expected future
cash flows from operations on an undiscounted basis. If such assets are
determined to be impaired, the impairment recognized is the amount by which the
carrying value of the assets exceeds the fair value of the assets. Fixed assets
to be disposed of by sale are carried at the lower of the then current carrying
value or fair value less estimated costs to sell.




Revenue
Recognition




We
generate revenue from professional services rendered to customers as well as
from application management support contracts with governmental units. Our
revenue is generated under time-and-material contracts and fixed-price
contracts.





Time-and-Material
Contracts




Time-and-material
contracts revenue is generated as costs are generally incurred in proportion
with contracted billing schedules and revenue is recognized as services are
performed, with the corresponding cost of providing those services reflected as
direct costs. Such method is expected to result in reasonably consistent profit
margins over the contract term.


21




Fixed-Price
Contracts




Revenue
from firm-fixed-price contracts is recognized upon achievement of the milestones
contained in the contracts in accordance with the provisions of Staff Accounting
Bulletin 104. Revenue is not recognized until collectibility is assured, which
does not take place until completion of the particular milestone. Costs are
recognized as services are performed.




We do not
derive revenue from projects involving multiple revenue-generating activities.
If a contract would involve the provision of multiple service elements, total
estimated contract revenue would be allocated to each element based on the fair
value of each element.




The
amount of revenue allocated to each element would then be limited to the amount
that is not contingent upon the delivery of another element in the future.
Revenue for each element would then be recognized depending upon whether the
contract is a time and-materials contract or a fixed-price, fixed-time
contract.




Stock-Based
Compensation




On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”).  SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans.  The provisions of SFAS
123R, as amended, are effective for small business issuers beginning as of the
next interim period after December 15, 2005.  We have adopted these
provisions as of January 1, 2006, and this adoption did not have a material
effect on our operations.




On
January 1, 2006, we adopted the provisions of FAS No. 123R “Share-Based Payment”
(“FAS 123R”) which requires recognition of stock-based compensation expense for
all share-based payments based on fair value. Prior to January 1, 2006, we
measured compensation expense for all of our share-based compensation using the
intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related
interpretations. We have provided pro forma disclosure amounts in accordance
with FAS No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure – an amendment of FASB Statement No. 123” (“FAS 148”), as if the fair
value method defined by FAS No. 123, “Accounting for Stock Based Compensation”
(“FAS 123”) had been applied to our stock-based compensation.




We have
elected to use the modified–prospective approach method. Under that transition
method, the calculated expense in 2006 is equivalent to compensation expense for
all awards granted prior to, but not yet vested as of January 1, 2006, based on
the grant-date fair values estimated in accordance with the original provisions
of FAS 123. Stock-based compensation expense for all awards granted after
January 1, 2006 is based on the grant-date fair values estimated in accordance
with the provisions of FAS 123R. We recognize these compensation costs, net of
an estimated forfeiture rate, on a pro rata basis over the requisite service
period of each vesting tranche of each award. We consider voluntary termination
behavior as well as trends of actual option forfeitures when estimating the
forfeiture rate.




Concentrations




We have
derived all of our revenue from agencies of the United States
Government.




Financial
instruments that potentially subject us to significant concentrations of credit
risk consist principally of accounts receivable and unbilled receivables. To
date, accounts receivable and unbilled receivables have been derived from
contracts with agencies of the federal government. Accounts receivable are
generally due within 30 days and no collateral is required.




22


Segment
Reporting




We follow
the provisions of SFAS 131, “Disclosures about Segments of an
Enterprise and Related Information.” This standard requires that
companies disclose operating segments based on the manner in which management
disaggregates the company in making internal operating decisions. We believe
that there is only one operating segment.




Fair
Value of Financial Instruments (other than Derivative Financial
Instruments)




The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments. For the notes
payable, the carrying amount reported is based upon the incremental borrowing
rates otherwise available to us for similar borrowings. For the warrants that
are classified as derivatives, fair values were calculated at net present value
using our weighted average borrowing rate for debt instruments without
conversion features applied to total future cash flows of the
instruments.




Convertible
Instruments




We review
the terms of convertible debt and equity securities for indications requiring
bifurcation, and separate accounting, for the embedded conversion feature.
Generally, embedded conversion features, where the ability to physical or
net-share settle the conversion option is not within our control, are bifurcated
and accounted for as a derivative financial instrument. Bifurcation of the
embedded derivative instrument requires allocation of the proceeds first to the
fair value of the embedded derivative instrument with the residual allocated to
the debt instrument. The resulting discount to the face value of the debt
instrument is amortized through periodic charges to interest expense using the
Effective Interest Method.




Income
Taxes




Under
Financial Accounting Standards Board Statement No. 109, “Accounting for Income
Taxes,” the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.




Uncertainty
in Income Taxes




In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in
Income Taxes.” This interpretation requires recognition and measurement
of uncertain income tax positions using a “more-likely-than-not”
approach. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. Management has adopted FIN 48 for 2008, and they evaluate their tax
positions on an annual basis, and has determined that as of June 30, 2008, no
additional accrual for income taxes is necessary.




(Loss)
Per Share of Common Stock




Basic net
(loss) per common share (“EPS”) is computed using the
weighted average number of common shares outstanding for the period. Diluted
earnings per share includes additional dilution from common stock equivalents,
such as stock issuable pursuant to the exercise of stock options and warrants.
Common stock equivalents are not included in the computation of diluted earnings
per share when we report a loss because to do so would be anti-dilutive for the
periods presented.




Research
and Development




Research
and development costs are expensed as incurred.


23




Recent
Issued Accounting Standards




In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This
standard defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2008. Early adoption is
encouraged. The adoption of SFAS 157 is not expected to have a material impact
on the consolidated financial statements.




In
February 2008, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115”, (“FAS 159”) which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates. A
business entity is required to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is expected to expand the use of fair value
measurement. FAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years.




In
December 2006, the FASB Staff issued FSP EITF 00-19-2, “Accounting for Registration Payment
Arrangements” (“EITF
00-19-2”). EITF 00-19-2 addresses an issuer’s accounting for registration
payment arrangements. EITF 00-19-2 specifies that the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies. EITF 00-19-2 is effective for financial statements issued for
fiscal years beginning after December 15, 2006, and interim periods within those
fiscal years. Application of EITF 00-19-02 resulted in an adjustment in January
2008 reclassifying the derivative liability to additional paid-in capital and
retained earnings. The adjustment reduced the derivative liability by $1,031,703
and increased additional paid-in capital by $547,086 and increased retained
earnings by $484,617 which was the cumulative-effect adjustment resulting from
the adoption of this standard.




In
December 2008, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, changes in a parent’s ownership of a noncontrolling interest,
calculation and disclosure of the consolidated net income attributable to the
parent and the noncontrolling interest, changes in a parent’s ownership interest
while the parent retains its controlling financial interest and fair value
measurement of any retained noncontrolling equity investment.




SFAS 160
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. Management is determining the impact that the adoption of SFAS
No. 160 will have on our consolidated financial position, results of operations
or cash flows.




In
December 2008, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”), which replaces
FASB SFAS 141, Business Combinations. This Statement retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting be used for
all business combinations and for an acquirer to be identified for each business
combination. SFAS 141R defines the acquirer as the entity that obtains control
of one or more businesses in the business combination and establishes the
acquisition date as the date that the acquirer achieves control. SFAS 141R will
require an entity to record separately from the business combination the direct
costs, where previously these costs were included in the total allocated cost of
the acquisition. SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date. This compares to
the cost allocation method previously required by SFAS No. 141.




SFAS 141R
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met. Finally, SFAS 141R will require an entity to recognize
contingent consideration at the date of acquisition, based on the fair value at
that date. This Statement will be effective for business combinations completed
on or after the first annual reporting period beginning on or after December 15,
2008. Early adoption of this standard is not permitted and the standards are to
be applied prospectively only. Upon adoption of this standard, there would be no
impact to our results of operations and financial condition for acquisitions
previously completed. The adoption of SFAS No. 141R is not expected to have a
material effect on our consolidated financial position, results of operations or
cash flows.


24




In
December 2008, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expresses
the current view of the staff that it will accept a company's election to use
the simplified method discussed in Staff Accounting Bulletin No. 107, “Share Based Payment", (“SAB107”), for estimating the
expected term of “plain
vanilla” share options regardless of whether the company has sufficient
information to make more refined estimates. SAB 110 became effective for us on
January 1, 2008. The adoption of SAB 110 is not expected to have a material
impact on our final position.




In March
2008, the FASB Task Force approved confirming changes for Issue No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios” to reflect more clearly the consensus
on EITH 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments”, and the issuance of FASB Statement No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity”. In addition, the Task Force decided to provide transition guidance for
those conforming changes as outlined in EITF 08-4, “Transition Guidance for
Conforming Changes to Issue 98-5”. Management used the EITF 00-27 and EITF 98-5
guidance to determine beneficial conversion options and accounting for
convertible debt instruments and convertible stock (collectively, convertible
instruments) with nondetachable conversion options that are
in-the-money.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the consolidated financial
statements upon adoption.




Three
Months Ended March 31, 2009 and 2008




Revenue
for the three months ended March 31, 2009 was $0, a decrease of 100%, from
$53,261 for the same period in 2008. This was a result of a decrease in
government contracts.




Direct
costs for the three months ended March 31, 2009 were $18,840 compared to
$118,524 for the same period in 2008, a decrease of $99,684. This resulted
primarily from a reduction of government contracts.




Operating
expenses for the three months ended March 31, 2009, which include indirect
labor, professional fees, advertising, consulting and general and
administrative, decreased $406,523 to $147,290 for the period ended March
31, 2009 from $553,813 for the same period in 2008. This represents
a decrease of 73% and is primarily a result of decreased indirect and
overhead labor and fringes of $170,110 resulting from the terminations of two
former executives and departure of one other executive and additional staff
reductions in 2008 and a $116,625 reduction in stock issued for services as a
result of decreased staff.




Interest
expense increased $37,828 in the three months ended March 31, 2009 due to
increased amounts of debt in 2009 compared to 2008.




Liquidity
and Capital Resources




We had
cash of $107 at March 31, 2009 and a working capital deficit of
$2,058,808.  During the three months ended March 31, 2009, we used
approximately $18,398 of cash from our operations.




Our operations
in 2009 have been funded from the borrowings of promissory notes of
$50,000.


25





We will
need to generate significant additional revenue to support our projected
increases in staffing and other operating expenses in light of our anticipated
merger at the end of July 2009 with The Irus Group. We are currently expending
approximately $70,000 per month to support our operations, and under our current
business plan that anticipates completing the merger with The Irus Group we
would be expending approximately $650,000 per month by the end of fiscal 2009.
We expect to raise additional financing through sale of shares of our common
stock until the expected closing date of the merger with The Irus Group at the
end of July 2009 that will, we believe, allow us to raise enough
capital  that combined with the cash generated by our combined
companies will be  sufficient to fund our operations through the end
of December 2009. If we are unable to generate increased revenue, raise
additional capital or find another merger partner with sufficient revenues to
support our operations, it will be necessary for us to significantly reduce
expenses to stay in business. Although we believe the additional capital we will
require will be provided through one of these sources, we cannot assure you that
we will be successful in these financing efforts or find financing at acceptable
prices. Our failure to generate such revenue, reduce expenses or obtain
necessary financing could impair our ability to stay in business and raises
substantial doubt about our ability to remain as a going concern.




Item
3.    Quantitative and Qualitative Disclosures About Market
Risk.




Not applicable




Item
4T.  Controls and Procedures.




Evaluation
of disclosure controls and procedures.




Our
management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as
of  March 31, 2009. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are not effective due to the existence of material weaknesses in
our internal control over financial reporting discussed in our Annual Report on
Form 10-K for the year ended December 31, 2008 and which remain
unremediated.




Changes
in internal control over financial reporting.




During
the last fiscal quarter, there was no change in our internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.


26


PART
II — OTHER INFORMATION




Item
1.    Legal Proceedings.




Arnold
Worldwide, Inc., the landlord of InferX at its former premises at 1600
International Drive, Suite 110, McLean, Virginia 22102 , commenced an unlawful
detainer action against InferX in the General District Court of Fairfax County,
seeking (i) damages, including rent due under the sublease between InferX and
Arnold Worldwide, late fees due under the sublease, and attorney’s fees due
under the sublease for approximately $94,555; and (ii) an order for possession
of the Premises.  The case was dismissed without prejudice in May 2008
subject to a series of payments promised by InferX. InferX has paid
approximately $30,000 leaving a deficiency of approximately $65,000. We agreed
to the entry of a Consent Order of Possession that allowed Arnold Worldwide to
take possession of the premises since we wanted to reduce our expenses as much
as possible and find less expensive office space.  The lease for the
premises at 1600 International Drive terminated November 30, 2008.




Item
1A.    Risk Factors.




Not
Applicable.




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




During
the three months ended March 31, 2009 we made unregistered sales of stock in the
aggregate principal amount of $20,000 to several investors from January 3, 2009
through March 31, 2009 under stock purchase agreement to meet some of the
operational expenses.  All of the unregistered sales were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended,
on the basis that all purchasers were accredited investors.




Item
3.    Defaults Upon Senior Securities.




None.




Item
4.    Submission of Matters to a Vote of Security
Holders.




None.




Item
5.    Other Information.




None.




Item
6.    Exhibits.




31.1
              Certification
      of the Chairman of the Board required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
              Certification
      of the Principal Executive, Financial and Accounting Officer required by
      Rule 13a-14(a) or Rule 15d-14(a).32.1
              Certification
      of the Chief Executive Officer and Chief Financial Officer required by
      Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C.
  1350.




27


SIGNATURES





In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.





Dated:
      July 13, 2009
              InferX
      CorporationBy:
              /s/B.K. GogiaB.K.
      GogiaChairman
      of the Board(Principal
      Executive, Financial andAccounting
      Officer)


28


InferX
Corporation


Quarterly
Report on Form 10-Q


for the
Quarterly Period Ended


March 31,
2009





-
EXHIBIT INDEX -




Exhibit No.
              
              Description31.1
              
              Certification
      of the Chairman of the Board required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
              
              Certification
      of the Principal Executive, Financial and Accounting Officer required by
      Rule 13a-14(a) or Rule 15d-14(a).32.1
              
              Certification
      of the Chairman of the Board and Principal Executive, Financial and
      Accounting Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18
      U.S.C. 1350.


29