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INFINITY AUGMENTED REALITY, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
[April 11, 2014]

INFINITY AUGMENTED REALITY, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) Special Note: Certain statements in this quarterly report on Form 10-Q concerning our business prospects or future financial performance, anticipated revenues, expenses, profitability or other financial items, estimates as to size, growth in or projected revenues from the life settlement market, developments in industry regulations and the application of such regulations, expected outcomes of pending or potential litigation and regulatory actions, and our strategies, plans and objectives, together with other statements that are not historical facts, are "forward-looking statements" as that term is defined under the federal securities laws. All of these forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission, ("SEC"), including our Annual Report on Form 10-K for the year ended August 31, 2013 ("Fiscal 2013"), particularly in the sections entitled "Item 1A - Risk Factors" and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Report or to reflect the occurrence of unanticipated events. Shareholders and potential shareholders should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Report. Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside of our control, and involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made, including, but not limited to, the following: · actual or anticipated fluctuations in our quarterly and annual operating results; · actual or anticipated product constraints; · decreased demand resulting from changes in laws; · product and services announcements by us or our competitors; · loss of any of our key executives; · regulatory announcements, proceedings or changes; · competitive product developments and legal developments; · any business combination we may propose or complete; · any financing transactions we may propose or complete; or · broader industry and market trends unrelated to its performance.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.

Overview During the year ended August 31, 2012, we formed a wholly-owned subsidiary Infinity Augmented Reality, LLC ("IAR Subsidiary") which was actively engaged in the development of software applications which will utilize augmented reality.

On February 26, 2013, the Company memorialized its understandings regarding prior and future activities with Infinity Advanced Technologies LTD ("IATL"), a company organized under the laws of the State of Israel which is developing applications for the Company's augmented reality activities. In consideration of the services provided, IATL shall be entitled to receive a monthly base fee of $53,000. Additional charges may be incurred upon prior approval of the Company.

Effective June 30, 2013, the Company terminated its services agreement with IATL.

Effective March 7, 2013, we changed our name from Absolute Life Solutions, Inc.

to Infinity Augmented Reality, Inc. On that same date, we merged our IAR Subsidiary into the Company. We are currently actively engaged in the development of Augmented Reality software. Our objective is to establish ourself firmly as a preeminent source for state-of-the-art augmented reality experiences, forging a strong association, early on, between the Infinity brand and the burgeoning medium.

Augmented reality is a medium in which real sensory inputs are enhanced, or augmented, with relevant digital information from the Internet. Using specially equipped eyewear, virtual images, video, and sound are superimposed for the user over what is actually seen and heard, heightening the real-life experience with additional information that is pertinent, informative, practical, and/or entertaining. The individual user may also be fully immersed in a virtual world, temporarily blocking out real surroundings. With augmented reality, sensory inputs are no longer limited to what is within eyeshot or earshot, but may incorporate, in real-time, all that the network has to offer.

Augmented reality requires an interface, such as digitally-enhanced eyewear, that can instantaneously overlay virtual images and video on top of what is actually experienced. There are few companies in the process of developing augmented reality glasses that will change the way users see and interact with the world. We will utilize our augmented reality software through these glasses and/or through other mobile devices such as smart phones. As the individual turns his or her head in various directions and looks at different people or objects through the eyewear, the sights that are overlaid change accordingly.

20 --------------------------------------------------------------------------------Results of Operations Our results of operations for the three months and six months ended February 28, 2014, consisted of research and development, Marketing and administrative expenses for personnel, leased office space and professional fees, income tax expense and loss from discontinued operations.

Three months and six months ended February 28, 2014 compared to three months and six months ended February 28, 2013 Three Three months months Six months Six months ended ended ended ended February 28, February February 28, February 28, 2014 28, 2013 2014 2013 Research and Development expenses $ (484,692 ) $ - $ (829,491 ) $ - Marketing expenses (53,781 ) - (96,179 ) - General and administrative expenses (1,096,812 ) (622,003 ) (1,784,847 ) (882,673 ) Total Operating expenses (1,635,285 ) (622,003 ) (2,710,517 ) (882,673 ) Other income (expense) Foreign exchange gain 8,689 - 19,884 - Interest expense (191,816 ) - (322,748 ) - Loss from continuing operations before income tax (1,818,412 ) (622,003 ) (3,013,381 ) (882,673 ) Provision for income tax - (27,783 ) - (190,652 ) Loss from continuing operations (1,818,412 ) (649,786 ) (3,013,381 ) (1,073,325 ) Loss from discontinued operations (including loss on disposal of $8,438,584 for the six months ended February 28, 2013), net of tax (114,966 ) (53,798 ) (114,966 ) (4,318,440 ) Net loss $ (1,933,378 ) $ (703,584 ) $ (3,128,347 ) $ (5,391,765 ) Operating expenses: Operating expenses increased from $622,003 and $882,673 for the three months and six months ended February 28, 2013 respectively to $1,635,285 and $2,710,517 for the three months and six months ended February 28, 2014 respectively. Operating expenses were primarily related to salaries, stock based compensation and other operating cost resulting from development of augmented reality applications mainly in the Israeli subsidiary. All of the operating expenses from the prior period that was related to our life settlements business were reclassified to discontinued operations. See Note 3 - Discontinued Operations to the Condensed Consolidated Financial Statements contained elsewhere in this Form 10-Q for more information.

Interest Expense: Interest expense for the three months and six months ended February 28, 2014 increased to $191,816 and $322,748 respectively as compared to $0 in the three months and six months ended February 28, 2013. Interest expenses include interest on Convertible Debts and amortization of debt discount related to convertible debt.

Income Tax: Income tax expense for the three months and six months ended February 28, 2013 respectively was $27,783 and $190,652. The expenses are primarily attributable to an increase in the valuation allowance because the Company entered the development stage.

There were no income tax expenses resulting from changes in the deferred tax asset in the three months and six month ended February 28, 2014 because we recorded a full valuation allowance against the deferred tax asset resulting from the our NOL, since we concluded that it is more likely than not that we will not realize the benefit of our deferred tax assets by generating sufficient taxable income in future years.

Net Loss from continuing operations: We reported a net loss from continuing operations of $1,818,412 and $3,013,381 for the three months and six months ended February 28, 2014 respectively compared to a net loss of $649,786 and $1,073,325 for the three months and six months ended February 28, 2013 respectively. The increase of $1,168,626 and $1,940,056 is primarily attributable to an increase of $484,692 and $829,491 in research and development expenses, an increase of $528,590 and $998,354 in marketing and general and administrative expenses for continuing operations, an increase of $191,816 and $322,748 in interest expense for continuing operations, an increase of $8,689 and $19,884 in foreign exchange gains on our investment in Infinity Israel and a decrease of $27,783 and $190,652 in income tax expense for continuing operations. Refer to preceding discussions for explanation of variances.

Loss from discontinued operations: Loss from discontinued operations was $114,966 in the three months and six months ended February 28, 2014 respectively. The expenses resulted from a true up of income taxes related to the year end 2012 and 2013 tax returns.

21 --------------------------------------------------------------------------------Liquidity and Capital Resources Net cash used in operating activities for the six months ended February 28, 2014 was $2,173,903. Net cash used in investing activities was $70,803 arising from purchase of computer equipment. Net cash provided by financing activities was $2,099,926 arising from proceeds from convertible debentures and exercise of stock options. This resulted in a decrease in cash of $143,836.

Working Capital and Capital Availability: As of February 28, 2014, we had negative working capital of $1,170,995 consisting of negative working capital of $297,074 from continuing operations and negative working capital of $873,921 from discontinued operations. Subsequent to February 28, 2014, we issued Convertible Debentures and received aggregate proceeds of $100,000. To provide a secure and assured source of financing to the Company for its funding needs through the end of 2014, Credit Strategies LLP (the "Lead Investor"), on behalf of itself and its affiliates, and Genesis Angels Fund LP, a limited partnership organized under the laws of New Zealand (collectively the "Purchasers"), have agreed to purchase $2,500,000 in the aggregate of the Company's Convertible Debentures Series A-14, bearing an interest rate of 1.20% per annum, payable semi-annually in cash or kind, at the Company's option, convertible into the Company's Common Stock at the rate of $0.25 per share together with Warrants to purchase up to 10,000,000 shares of Common Stock at an exercise price of $0.50 per share, both expiring March 31, 2019.

On March 24, 2014, the Company's board of directors approved the Securities Purchase Agreement with each of the Purchasers, substantially upon the terms set forth in the Securities Purchase Agreement (the "2014 SPA"), and to accept the offer of each of the Purchasers, to purchase its respective portion of the $2,500,000 of the Company's Convertible Debentures Series A-14 with Warrants on the terms previously set forth in the 2014 SPA. We anticipate that barring unforeseen developments, the proceeds received from these subsequent debt financings will sustain our operations until December 31, 2014. To date, we issued a total of approximately $4,057,543 of Convertible Debentures with a maximum available of $5,000,000. We anticipate raising additional funds to continue our augmented reality operations through subsequent debt or equity offerings to one or more accredited investors. Such issuances may dilute the interests of our existing shareholders. During the next twelve months, we anticipate that we will not generate significant cash from operations. We are unable to estimate our working capital requirements and capital availability for the next twelve months.

Going Concern Qualification The Company will require additional funds to finance its new augmented reality operations. Effective November 15, 2012, we are a development stage company dependent upon the expected demand for our software applications and our ability to generate sufficient cash from our augmented reality business to meet our obligations as they come due. We may not be able to obtain additional financing on reasonable terms or at all. These conditions raise substantial doubt about our ability to continue as a going concern. However, there can be no assurance that the Company can successfully implement its business plan, and it is uncertain that the Company will achieve a profitable level of operations and be able to obtain additional financing. There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.

Application of Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations are based on our financial statements that were prepared in accordance with accounting principles generally accepted in the United States of America. To guide our preparation, we follow accounting policies, some of which represent critical accounting policies as defined by the SEC. The SEC defines critical accounting policies as those that are both most important to the portrayal of a company's financial condition and results and require management's most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates involve significant judgments, assumptions and estimates by management that may have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent liabilities, and the reported amounts of income and expenses during the reporting period that management considers critical accounting estimates.

The judgments, assumptions and estimates used by management are based on historical experience, management's experience, knowledge of the accounts and other factors that are believed to be reasonable. Because of the nature of the judgments and assumptions made by management, actual results may differ materially from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations. Areas affected by our estimates and assumptions are identified below.

We apply the principles of ASC 985-20, Software- Costs of Software to Be Sold, Leased, or Marketed, which requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product. We have adopted the "tested working model" approach to establishing technological feasibility for its products. Under this approach, a product in development is not considered to have passed the technological feasibility milestone until we have produced a model of the product that contains essentially all the functionality and features of the final product and have tested the model to ensure that it works as expected. We have expensed all software development costs when incurred since they have not reached technological feasibility.

We account for the BCF and warrant valuation in accordance with ASC 470-20, Debt with Conversion and Other Options. We record a BCF related to the issuance of convertible debt that has conversion features at fixed rates that are "in-the-money" when issued and the fair value of warrants issued in connection with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their relative fair value, and as a reduction to the carrying amount of the convertible debt equal to the intrinsic value of the conversion feature. The discount recorded in connection with the BCF and warrant valuation is recognized as non-cash interest expense and is amortized over the terms of the convertible notes.

22-------------------------------------------------------------------------------- We record stock-based compensation expense in accordance with ASC 718, Compensation - Stock Compensation. We expense stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards and forfeiture rates. For stock-based compensation awards to non-employees, we re-measure the fair value of the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award. The assumptions used in calculating the fair value of stock-based awards represent management's best estimates and involve inherent uncertainties and the application of management's judgment.

We review the carrying value of the property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment includes current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment during the six months ended February 28, 2014.

We evaluate the useful lives of our property and equipment to assure that an adequate amount of depreciation is being charged to operations. Useful lives are based generally on specific knowledge of an asset's life.

We are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes.

These differences result in deferred tax assets and liabilities. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include a tax provision or reduce our tax benefit in the statements of operations. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

We have not made any material changes to our critical accounting estimates or assumptions or the judgments affecting the application of those estimates or assumptions.

Off-Balance Sheet Arrangements We did not engage in any off-balance sheet arrangements or transactions.

Outlook Effective March 7, 2013, we changed our name from Absolute Life Solutions, Inc.

to Infinity Augmented Reality, Inc. On that same date, we merged our IAR Subsidiary into the Company. We are actively engaged in the development of software platform, which will utilize Augmented Reality. On February 26, 2013, we memorialized our understandings regarding prior and future activities with Infinity Advanced Technologies LTD ("IATL"), a company organized under the laws of the State of Israel which is developing applications for our augmented reality activities. Effective June 30, 2013, the Company terminated its services agreement with IATL.

We are currently in the process of developing a number of augmented reality technologies. We believe our Company and our industry are fundamentally sound and well positioned to deal with the current uncertainty in the financial and capital markets. We carry no operational debt and do not rely on leverage in our capital structure. We do rely, however, upon the availability of investment capital. While it is conceivable that a financial crisis could diminish the supply of investment capital throughout the economy, we believe that greater investment capital will be placed in the augmented reality sector. We believe this is due to the fact that augmented reality is one of the technologies of the future.

We believe that domestic and international demand for augmented reality products will continue to grow as the industry continues to mature.

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