NOTE 1  –  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization  -  International Automated Systems, Inc. (the  “ Company ”  or  “ IAS ” ) was incorporated in the State of Utah on September 26, 1986. The Company ’ s activities to date have consisted of developing a business plan, raising capital through the issuance of debt and equity instruments, developing power generation equipment and obtaining the rights to certain technology related to electronic security and communication equipment.

Use of Estimates  -  The preparation of the 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 disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Basis of Presentation / Liquidity   - The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.   As of December 31, 2015, the Company had $3,773,874 of available cash and working capital of $538,544.  At June 30, 2015, the Company had available cash of $16,822 and a deficit in working capital of $(197,640).  For the three and six months ended December 31, 2015 and 2014, the Company had no revenue and no operating income.  For the six months ended December 31, 2015, the Company increased cash by $2,971,506 and for December 31, 2014 decreased net cash from  operating activities of $2,971,506 and $(39,260), respectively.

As of December 31, 2015, the Company ’ s total accumulated losses amounted to $(40,098,810).

Concentration Risks -  The Federal Deposit Insurance Corporation (FDIC) insures cash deposits in most general bank accounts for up to $250,000 per institution.  The Company had cash deposits that exceeded insured amounts of $3,273,874 and $-0- as of December 31, 2015 and June 30, 2015, respectively.

Cash Equivalents -  The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Fair Value of Financial Instruments   - The Company ’ s financial instruments consist of cash and cash equivalents, and payables.  The carrying amount of cash and cash equivalents and payables approximates fair value because of the short-term nature of these items.  

Impairment  - The Company records impairment losses on property, equipment and patents when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets ’  carrying amount.  Furthermore, the Company makes periodic assessments about each patent and the related technology to determine if it plans to continue to pursue the technology and if the patent has value.  

As of December 31, 2015 the Company has no unimpaired patents and the equipment is fully depreciated.

Research and Development  - Research and development has, historically, been the principal function of the Company. Research and development costs are expensed as incurred.  Expenses in the accompanying financial statements include certain costs which are directly associated with the Company ’ s research and development of the Solar Lens technology.  These costs, which consist primarily of monies paid for consulting expenses, materials and supplies and compensation costs amounted to $714 and $18,704 for the three and six months ended December 31, 2015, respectively.  For the comparative three and six

month periods ended December 31, 2014, the research and development expenses were $851 and $3,105 respectively.  

Advertising Costs  - Advertising costs are expensed when incurred. There were no advertising expenses for the three months and six months ended December 31, 2015 and 2014, respectively.

Property and Equipment   - Property and equipment are recorded at cost and are depreciated using the straight-line method based on the expected useful lives of the assets. Depreciation expense for the three months ended December 31, 2015 and 2014 was $-0- and $506, respectively.  For the comparative six month periods ended December 31, 2015 and 2014, depreciation expense was charged $-0- and $1,011.  The major classes of assets are as follows:

Income Taxes   -   The Company recognizes the amount of income taxes payable or refundable for the current year and recognizes deferred tax assets and liabilities for operating loss carryforwards and for the future tax consequences attributable to differences between the financial statement amounts of certain assets and liabilities and their respective tax basis. Deferred tax assets and deferred liabilities are measured using enacted tax rates expected to apply to taxable income in the years those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance to the extent that uncertainty exists as to whether the deferred tax assets will ultimately be realized.  The Company ’ s policy for recording interest and penalties associated with taxes is to recognize it as a component of income tax

As of December 31, 2015 and June 30, 2015, there were no deferred tax assets or liabilities.

Condensed Financial Statements -  The accompanying financial statements have been prepared by the Company without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at December 31, 2015 and June 30, 2015, results of operations, and cash flows at December 31, 2015 and 2014, have been made.

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.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company ’ s June 30, 2015 audited financial statements.  The results of operations for the periods ended December 31, 2015 and 2014 are not necessarily indicative of the operating results for the full year.

Recent Accounting Pronouncements  –   The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position or cash flows.  Based on that review, the Company believes that none of these pronouncements will have a significant effect on these financial statements.

NOTE 2  –  BASIC AND DILUTED NET LOSS PER COMMON SHARE

Basic earnings/loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing the net income or loss by the sum of the weighted average number of common shares plus the weighted average common stock equivalents which would arise from the exercise of outstanding stock options, issuance of stock held in trust and conversion of Series B Preferred Shares into options to purchase shares of common stock, using the treasury stock method and the average market price per share during the period.

NOTE 3  –  RELATED PARTY TRANSACTIONS

The Company owes $149,214 and $163,668 to officers of the Company for expenses paid on the Company ’ s behalf as of December 31, 2015 and June 30, 2015, respectively.  The liability is non-interest bearing, unsecured and due upon demand.

NOTE 4  –  STOCK BASED COMPENSATION

Options and Warrants

The Company ’ s board of directors authorized the Company to enter into an agreement dated May 14, 2004 and amended October 13, 2004, with the Company ’ s president, in which the Company acquired patents, patents pending, designs and contracts related to certain technology developed by the president.   No historical cost value has been assigned to these patents as they were acquired from the president (a related party).  

As consideration, the Company authorized and issued warrants to purchase 100,000,000 shares of common stock to the president and agreed to pay the president royalties in the future equal to 10% of future proceeds related to income from the technology.  The warrants, which were considered stock-based compensation for services to be rendered, had no intrinsic value on the grant date.  The fair value of the warrants was $37,136,781, calculated on the grant date using the Black-Scholes model. The following assumptions were used for this grant: Average risk-free interest rate of 4.79%; expected lives of 10 years; expected dividend yield of zero percent; and expected volatility of 138.76%. On July 1, 2006, the Company began recognizing stock-based compensation expense over the graded exercisability period of the options using the straight-line basis over the requisite service period for each separately exercisability portion of the award  as if the award was, in-substance, multiple awards.

The agreement contains a standard anti-dilution clause that gives the president the right to purchase the same number of shares of common stock, given reclassification, reorganization or change by a stockholder, as were purchasable prior to any such changes, at a total price equal to that payable upon the exercise of the options.  Appropriate adjustments shall be made to the exercise price so the aggregate purchase price of the shares will remain the same.  The warrants have an exercise price of $0.40 per share and are all exercisable as of December 31, 2015.

The following table summarizes the stock option and warrant activity as of and for the years ended December 31, 2015:

NOTE 5  –  PREFERRED STOCK

Series A Preferred Stock

The Series A Preferred Stock has equal dividend rights to the common shares, is not convertible into common shares, has no cumulative dividend requirements and has liquidation preferences equivalent to the common shares. 3,400,000 of the Series A Preferred Stock are entitled to the voting rights of 10 common shares, and 2,000,000 of the Series A Preferred Stock are entitled to the voting rights of 100 common shares.  At December 31, 2015 and June 30, 2015, there were 5,400,000 Series A Preferred Stock issued and outstanding, respectively.

Series B Preferred Stock

The Series B Preferred Stock has equal dividend rights to the common shares, has no cumulative dividend requirements, has liquidation preferences equivalent to the common shares and each preferred share is entitled to the voting rights of 10 common shares.  Each share is convertible into options to purchase two shares of common stock at $3.00 per share, exercisable immediately and the options expire ten years from the date the preferred stock is exchanged.  At December 31, 2015 and June 30, 2015, there were 300,000, series B Preferred shares issued and outstanding.