News Column

BOOMERANG SYSTEMS, INC. - 10-Q/A - Management's Discussion and Analysis OF FINANCIAL CONDITION AND RESULTS OF OperationS

May 20, 2014

INTRODUCTION

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and accompanying notes appearing elsewhere in this report. This discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward looking statements as a result of certain factors, including but not limited to the risks discussed in this report.



LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents for the six months ended March 31, 2014, increased by $451,054 to $1,087,994. This increase is attributable to cash provided by financing activities of $2,437,296, offset by cash used in operations of $1,979,667 and cash used in investing activities of $6,575. At the present time, we believe our working capital together with the available borrowings under our Loan Agreement (defined below) and the expected cash flow from ongoing projects will be sufficient to support our administrative requirements and existing projects until April 2015. To implement our full business plan, we may require additional funds, and anticipate seeking to raise these funds through public or private debt or equity offerings, including offerings to our existing security holders. In addition, we may seek to restructure our existing liabilities and debt. There can be no assurance that the capital we require to meet our operating needs will be available to us on favorable terms, or at all. If we are unsuccessful in raising sufficient capital, we may be required to curtail our operations and could default on our existing indebtedness. The unaudited, condensed financial statements included in this report do not include any adjustments that may result from this uncertainty. For the six months ended March 31, 2014, we had net income of $5,283,631. Included in this net income were several non-cash expenses that partially offset the cash used in operations. These non-cash expenses include depreciation of $146,666, amortization of discount on convertible debt of $1,973,009, grant of options for services of $171,479 and issuance of common stock for interest of $625,267. These non-cash expenses were offset by a non-cash gain on the fair value of derivative of $11,069,403. Cash used in operations was primarily related to six month increases in inventories of $1,418,753, and accounts receivable of $744,608. These items were offset by increases in accounts payable and accrued liabilities of $301,134, prepaid expenses of $62,098, estimated loss on uncompleted contract of $121,618, due to related party of $88,305, deposit payable of $5,000 and billings in excess of costs of $2,094,260. In addition, cash used in operations decreased due to a decrease in costs in excess of billings of $380,630. After adjusting our net loss for these non-cash items and the net changes in assets and liabilities, net cash used in operations was $1,979,667 for the six months ended March 31, 2014. Financing activities provided $2,437,296 for the six months ended March 31,2014. Net cash provided by financing activities consisted of $2,452,207 of borrowings under the Loan Agreement, offset by $14,911 of note repayments. 19



During the six months ended March 31, 2014, net cash used in investing activities consisted of an increase in property, plant and equipment of $6,575.

Convertible Notes As of March 31, 2014, the Company had approximately $20.9 million of indebtedness under convertible promissory notes associated with the November/December 2011 Offering ("2011 Notes"), June/July 2012 Offering ("2012 Notes") and December 2012 Offering ("December 2012 Notes" and, together with the 2011 Notes and 2012 Notes, the "Notes"). The Notes become due between November 2016 and December 2017. The Notes are convertible into 2,898,904 shares of common stock at $4.01, 1,324,807 shares of common stock at $4.68 and 651,498 shares of common stock at $4.72. The 2011 Notes and 2012 Notes are subject to a weighted average adjustment, and the December 2012 Notes a full ratchet adjustment, in each case, for issuances of common stock or common stock equivalents below the conversion price, subject to certain exceptions. The respective conversion price for the 2012 Notes and December 2012 Notes may not be adjusted below $0.25. Interest accrues on the Notes at 6% per annum, payable quarterly at the Company's option in: (i) cash or (ii) shares of Common Stock.



Certain officers, directors, 5% stockholders and affiliates hold approximately $9.8 million aggregate principal amount of such Notes.

For so long as the above Notes are outstanding, without the prior written consent of the holders of at least a majority of the aggregate principal amount of each of the Notes, the Company may not:

· create, incur, assume or suffer to exist, any indebtedness, contingent and

otherwise, which should, in accordance with generally accepted accounting

principles consistently applied, be classified upon the Company's balance sheet

as liabilities and which would be senior or pari passu in right of payment to

the notes, except for: (i) secured or unsecured debt issued to a bank or

financial institution on commercially reasonable terms, or (ii) any other debt

not to exceed $5 million, individually, or in the aggregate;



· and may not permit its subsidiaries to, engage in any transactions with any

officer, director, employee or any affiliate of the Company, including any

contract, agreement or other arrangement providing for the furnishing of

services to or by, providing for rental of real or personal property to or

from, or otherwise requiring payments to or from any officer, director or such

employee or, to the knowledge of the Company, any entity in which any officer,

director, or any such employee has a substantial interest or is an officer,

director, trustee or partner, in each case in excess of $50,000, other than:

(i) for payment of reasonable salary for services actually rendered, as

approved by the Board of Directors of the Company as fair in all respects to

the Company, (ii) reimbursement for expenses incurred on behalf of the Company

(iii) transactions and written arrangements in existence on the date of the

initial issuance of the notes, and any amendments, modifications,

cancellations, terminations, limitations and waivers approved by a majority of

the independent disinterested directors of the Company; and



· and may not permit any subsidiary to: (i) declare or pay any dividends or make

any distributions to any holder(s) of common stock or such subsidiaries (other

than dividends and distributions from a subsidiary to the Company) or (ii)

purchase or otherwise acquire for value, directly or indirectly, any shares or

other equity security of the Company, other than the notes or warrants issued

in connection with the notes Derivative Liability The Company has valued the warrants issued in connection with the November/December 2011 Offering, the 2011 Warrants, and the beneficial conversion features ("BCF") of the 2011 Notes, to their maximum value in proportion to the 2011 Notes and had accounted for them as a discount to the debt. In certain circumstances the convertibility features and the attached Warrants contain reset provisions which adjust the conversion price of the 2011 Notes and the exercise price of the 2011 Warrants should the Company sell additional shares of common stock below the initial conversion price of the 2011 Notes or warrant exercise price as agreed to upon entry into the convertible notes payable. The Company has assessed that the reset provision for the convertibility feature and the warrant exercise price are such that they are not indexed to the Common Stock and is therefore a derivative in accordance with ASC 815-40 (formerly EITF 07-5). As such the derivative was valued on the date of its initiation, with each issuance of convertible debt, and will be re-valued at its fair value at each subsequent interim and annual reporting period. 20

The Company valued the 2011 Warrants and the beneficial conversion features ("BCF") of the 2011 Notes, and the resulting derivative liability, at $5,309,941 each for the 2011 Warrants and the BCF, for a total of $10,619,882 recorded as a discount to the convertible debt during the first quarter of fiscal 2012. This discount will be amortized over the life of the note or until such time as the note is repaid or converted, or upon exercise of the 2011 Warrants. The valuation of the 2011 Warrants, BCF, and the resulting derivative liability, were determined using the Black-Scholes option pricing model with the following weighted assumptions for all debt issuances: i) expected dividend rate of 0%, ii) expected volatility of 52.7%, iii) risk free interest rate of 0.9%, and

iv) expected term of 5 years. As of September 30, 2013, the aggregate fair value of the derivative was $11,537,248. The revaluation of the derivative as of March 31, 2014 resulted in a derivative value of $684,440. The change in fair value of the derivative from September 30, 2013 to March 31, 2014 resulted in a gain on the fair value of the derivative liability of $10,852,808. The increase in the gain on the fair value of the derivative was due to a change in methodology in measuring the market price of the Company's common stock during the quarter ended March 31, 2014 (see Note 2). The derivative liability was revalued on March 31, 2014 using the Black-Scholes option pricing model with the following weighted assumptions: i) expected dividend rate of 0%, ii) expected volatility of 38.39%, iii) risk free interest rate of 1.73%, iv) expected term of 2.60 years and v) market price of $2.00. If the Company did not change this method of valuation, it would have recognized a gain on the fair value of the derivative liability of approximately $916,000. In connection with the 2011 Offering, the Company issued warrants to the placement agent (the "Placement Agent Warrants") to purchase shares of Common Stock. The Company issued an aggregate of 109,176 Placement Agent Warrants in November and December 2011 valued at $212,040. The Placement Agent Warrants were valued based on the Black-Scholes Model with assumptions similar to those used to value the 2011 Warrants issued to the purchasers of 2011 Notes in the 2011 Offering. The Placement Agent Warrants have similar terms to those issued to the convertible debt holders, including a reset provision included with the warrants if the Company should obtain equity financing at a price per share lower than that of the exercise price of the warrants. The Placement Agent Warrants, similar to the 2011 Warrants issued to the purchasers of 2011 Notes in the 2011 Offering, do not meet the definition of being indexed to the Company's own stock in accordance with ASC 815-40. Accordingly, the Company has recorded a derivative liability for the value of the Placement Agent Warrants. The derivative liability valued at $230,256 at September 30, 2013 was revalued at $13,661 at March 31, 2014. The difference in valuation for the six months ended March 31, 2014 was $216,595, accounted for as a gain on the fair value of derivative. The increase in the gain on the fair value of the derivative was due to a change in methodology in measuring the market price of the Company's common stock during the quarter ended March 31, 2014 (see Note 2). The valuation at March 31, 2014 was valued based on the Black-Scholes Model with assumptions similar to those used to value the 2011 Warrants granted to the debt holders as of March 31, 2014. If the Company did not change this method of valuation, it would have recognized a gain on the fair value of the derivative liability

of approximately $18,000.



June 2013 Loan and Security Agreement

On June 11, 2013, the Company and its wholly-owned subsidiaries Boomerang Sub, Inc., Boomerang USA Corp. and Boomerang MP Holdings Inc. (collectively with the Company, the "Borrowers" and individually, a "Borrower"), entered into a Loan and Security Agreement (the "Loan Agreement") dated as of June 6, 2013 with lenders who became a lender party thereto (together with any party which subsequently becomes a lender party, the "Lenders" and, individually, a "Lender") and the Agent (as defined in the Loan Agreement). Pursuant to the Loan Agreement, Lenders committed to fund $4,750,000 principal amount of loans to the Borrowers. The Loan Agreement contemplates that the aggregate principal amount of borrowings may be increased to $10,000,000 through commitments from additional Lenders who subsequently become a party to the Loan Agreement. On July 12, 2013 and August 6, 2013, the Borrowers entered into Amendments No. 1 (the "Amendment") and No. 2 (the "2nd Amendment") to the Loan Agreement (collectively "the Amendments"). Pursuant to the Amendments, the additional Lenders committed to fund an additional $3,100,000 principal amount of loans to the Borrowers, bringing aggregate commitments under the Loan Agreement to $7,850,000. As of September 30, 2013, the Company drew down an aggregate of $3,033,333 under the Loan Agreement. The Company drew down an additional $1,452,207 during the three months ended December 31, 2013, and $1,000,000 during the three months ended March 31, 2014, bringing the total amount of borrowings under the Loan Agreement to $5,485,540 as of March 31, 2014. The notes bear interest at the rate of 15% per annum, payable upon maturity. The maturity date of the Notes is May 31, 2016, subject to earlier prepayment upon acceleration of the occurrence of an event of default (as defined in the Loan agreement); provided further that the Company may prepay the Notes at any time without penalty. The Company accrued $332,345 of interest expense during the six months ended March 31, 2014. Total accrued interest related to the Loan Agreement is $439,715 as of March 31, 2014. 21

Pursuant to the Loan Agreement, the Borrowers assigned, pledged and granted to the Lenders a security interest in substantially all of their respective assets, including their respective intellectual property, accounts, receivables, general intangibles, equipment, inventory, all of the proceeds and products of the foregoing and the Company's equity interests in the other Borrowers. As partial consideration for providing advances under the Loan Agreement, the Company agreed to issue to each Lender warrants to purchase 20,000 shares of its common stock for each $100,000 advanced. The warrants are exercisable at $5.00 per share, subject to full-ratchet adjustment for issuance below the exercise price, subject to certain exceptions. The warrants expire on June 6, 2018. Pursuant to the draw downs during the year ended September 30, 2013, the Company issued warrants to purchase an aggregate of 606,680 shares of common stock. The Company valued these warrants at $1,357,139, recorded as a discount to long-term debt. During the six months ended March 31, 2014, the Company amortized $233,773 of the debt discount. Pursuant to the draw downs on October 29, 2013 and February 27, 2014, the Company issued warrants to purchase an aggregate of 490,481 shares of common stock. The Company valued these warrants at $572,437, recorded as a discount to long-term debt. This discount is being amortized over the life of the notes or until such time as the notes are repaid, or upon exercise of the warrants. The valuation of the warrants was determined using the Black-Scholes option pricing model with the following weighted assumptions: i) expected dividend rate of 0% ii) expected volatility of 38.39-43.36% iii) risk free interest rate of 1.73-1.75% and expected term of 4.27-4.6 years. During the six months ended March 31, 2014, the Company amortized $91,926 of the of debt discount.



The following officers, directors and 5% shareholders of the Company participated as Affiliate Lenders:

Amount Funded as of Aggregate Number Warrants Issued as of Name Commitment March 31,



2014 of Warrants Issuable March 31, 2014 The Estate of Gene Mulvihill(1) $ 500,000 $

349,409 100,000 69,882 Sunset Marathon Partners LLC(2) $ 250,000 $ 174,704 50,000 34,941 MRP Holdings LLC(3) $ 200,000 $ 139,761 40,000 27,951 David Koffman and Burton I. Koffman(4) $ 750,000 $ 524,413 150,000 104,822 Anthony P. Miele III(5) $ 25,000 $ 17,470 5,000 3,495 Alexandria Equities, LLC(6) $ 200,000 $ 139,758 40,000 27,953 Albert Behler(7) $ 200,000 $ 139,758 40,000 27,953 (1) Gail Mulvihill and Andrew Mulvihill, the co-administrators of the estate, exercise voting and investment power over the shares issuable upon



exercise of the Warrants. Gail Mulvihill is a principal stockholder of

the Company and mother of Christopher, the Company's President and a

principal stockholder of the Company. Andrew Mulvihill is a brother of

Christopher Mulvihill.



(2) James Mulvihill, a principal stockholder of the Company, has voting and

investment power over the shares issuable upon exercise of the Warrants

and is a brother of Christopher Mulvihill.



(3) MRP Holdings LLC is owned by Mark Patterson, the Chief Executive Officer

and a director and principal stockholder of the Company.



(4) Directly and indirectly through entities they control and by members of

their families and entities they control, Burton Koffman and David

Koffman are principal stockholders of the Company. In addition, David

Koffman was appointed as a director of the Company and a member of the Audit Committee in November 2013. (5) Anthony P. Miele, III is a director of the Company. 22

(6) Alexandria Equities, LLC is a principal stockholder of the Company.



(7) Albert Behler is a principal stockholder of the Company.

A majority of the principal amount of each series of convertible notes (due 2016, June 2017 and December 2017) consented to the Company's entering into the Loan Agreement and increasing the secured indebtedness under the Loan Agreement, and acknowledged that the secured indebtedness under the Notes is senior in right of payment and otherwise to the convertible notes. RESULTS OF OPERATIONS



FISCAL PERIOD FOR THE SIX MONTHS ENDED MARCH 31, 2014 COMPARED WITH SIX MONTHS ENDED MARCH 31, 2013.

Revenues were $3,336,863 for the six months ended March 31, 2014, compared with $289,234 for the six months ended March 31, 2013. The increase was attributable to work on a RoboticValet project that commenced in June 2013. Cost of goods sold were $3,910,907 for the six months ended March 31, 2014, compared with $162,284 for the six months ended March 31, 2013. The increase for the six months ended March 31, 2014, was attributable to work on the RoboticValet project that commenced in June 2013. Cost of goods sold exceeded gross revenues due to increased labor and software costs associated with the RoboticValet system. Sales and marketing expenses were $347,147 during the six months ended March 31, 2014, compared with $580,481 during the six months ended March 31, 2013, for a decrease of $233,334. The decrease was due to reduced spending of approximately $97,000 on marketing and tradeshows and a reduction of approximately $130,000 in salary related expense from the 2013 period. As of March 31, 2014, the Company employed two full-time sales persons compared to four full-time salespersons and one full-time support person as of March 31, 2013. Salespersons' salaries are recorded under sales and marketing expense. General and administrative expenses were $1,696,842 during the six months ended March 31, 2014, compared with $2,259,433 during the six months ended March 31, 2013, for a decrease of $556,895. This decrease was primarily due to reductions of approximately $520,000 in salary related expenses and $40,000 in travel expenses during the six months ended March 31, 2014. Research and development expenses were $74,125 during the six months ended March 31, 2014, compared with $1,624,727 during the six months ended March 31, 2013, for a decrease of $1,550,602. The decrease was due to less research and development projects undertaken during the six months ended March 31, 2014. Depreciation and amortization expenses were $146,666 during the six months ended March 31, 2014, compared to $199,242 during the six months ended March 31, 2013, for a decrease of $52,576. This decrease was the result of older assets becoming fully depreciated and the sale of certain fixed assets in July 2013.



Interest expense was $968,735 during the six months ended March 31, 2014, compared with $591,937 during the six months ended March 31, 2013, for an increase of $376,798. This increase is due to an increase in indebtedness through borrowings under the Loan Agreement and the issuance of the December 2012 Notes.

In connection with the 2011 Offering, the Company recorded a discount for the BCF and the 2011 Warrants. In addition, the Placement Agent Warrants were deemed not indexed to the Company's common stock and accordingly the Company recorded a derivative liability. The derivative liability is required to be revalued at each interim and annual reporting date until such time that it is settled. This revaluation resulted in a gain on fair value of derivative of $11,069,403 during the six months ended March 31, 2014. The increase in the gain on the fair value of the derivative was due to a change in methodology in measuring the market price of the Company's common stock during the quarter ended March 31, 2014 (see Notes 2 and 7 to the Financial Statements). With respect to the 2012 Offering and the December 2012 Offering, the Company recorded a discount for the BCF and the warrants issued in connection with each offering. In addition, the placement agent was granted warrants similar in their terms to those issued to the debt holders. The Company has determined that the 2012 Offering and the December 2012 Offering are indexed to the Company's common stock and has not recorded a derivative liability. The Company also recorded a discount for the warrants issued in connection with each draw down of the June 2013 Loan Agreement. During the six months ended March 31, 2014 the Company amortized an aggregate of $1,973,009 of the debt discount for the 2011 Offering, the 2012 Offering, December 2012 Offering and June 2013 Loan Agreement. 23



FISCAL PERIOD FOR THE THREE MONTHS ENDED MARCH 31, 2014 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2013

Revenues were $2,296,235 for the three months ended March 31, 2014, compared with $(57,678) for the three months ended March 31, 2013. The increase was attributable to work on a RoboticValet project that commenced in June 2013.

Cost of goods sold were $2,520,354 for the three months ended March 31, 2014, compared with $(137,474) for the three months ended March 31, 2013. The increase for the three months ended March 31, 2014, was attributable to work on the RoboticValet project that commenced in June 2013. Cost of goods sold exceeded gross revenues due to increased labor and software costs associated with the RoboticValet system. Sales and marketing expenses were $176,841 during the three months ended March 31, 2014, compared with $287,521 during the three months ended March 31, 2013, for a decrease of $110,680. The decrease was due to reduced spending of approximately $35,000 on marketing and tradeshows, a reduction of travel expense of approximately $7,000 and a reduction of approximately $65,000 in salary related expense. As of March 31, 2014, the Company employed two full-time sales persons compared to four full-time salespersons and one full-time support person as of March 31, 2013. Salespersons' salaries are recorded under sales and marketing expense. General and administrative expenses were $875,298 during the three months ended March 31, 2014, compared with $1,234,295 during the three months ended March 31, 2013, for a decrease of $353,301. This decrease was due to reductions of approximately $170,000 in salary related expenses and $60,000 in travel expenses. Also, in the period ended March 31, 2013, cessation of work under the Crescent Heights contract resulted in a reversal of warranty expenses of approximately $349,000, offset by an increase of approximately $483,000 in bad debt expense, compared to warranty expenses of approximately $7,000 and bad debt expense of $0 for the three months ended March 31, 2014. Research and development expenses were $26,328 during the three months ended March 31, 2014, compared with $1,041,421 during the three months ended March 31, 2013, for a decrease of $1,015,093. The decrease was due to less research and development projects undertaken during the three months ended March 31, 2014. Depreciation and amortization expenses were $73,417 during the three months ended March 31, 2013, compared to $106,924 during the three months ended March 31, 2013, for a decrease of $33,507. This decrease was the result of result of older assets becoming fully depreciated and the sale of certain fixed assets in July 2013.



Interest expense was $493,915 during the three months ended March 31, 2014, compared with $319,367 during the three months ended March 31, 2013, for an increase of $174,548. This increase is due to an increase in indebtedness through borrowings under the Loan Agreement and the issuance of the December 2012 Notes.

In connection with the 2011 Offering, the Company recorded a discount for the BCF and the 2011 Warrants. In addition, the Placement Agent Warrants were deemed not indexed to the Company's common stock and accordingly the Company recorded a derivative liability. The derivative liability is required to be revalued at each interim and annual reporting date until such time that it is settled. This revaluation resulted in a gain on fair value of derivative of $9,996,457 during the three months ended March 31, 2014. The increase in the gain on the fair value of the derivative was due to a change in methodology in measuring the market price of the Company's common stock during the quarter ended March 31, 2014 (see Notes 2 and 7 to the Financial Statements). With respect to the 2012 Offering and the December 2012 Offering, the Company recorded a discount for the BCF and the warrants issued in connection with each offerings. In addition, the placement agent was granted warrants similar in their terms to those issued to the debt holders. The Company has determined that the 2012 Offering and the December 2012 Offering are indexed to the Company's common stock and has not recorded a derivative liability. The Company also recorded a discount for the warrants issued in connection with each draw down of the June 2013 Loan Agreement. During the three months ended March 31, 2014, the Company amortized an aggregate of $994,843 of the debt discount for the 2011 Offering, the 2012 Offering, December 2012 Offering and June 2013 Loan Agreement.



OFF BALANCE SHEET ARRANGEMENTS

There were no off-balance sheet arrangements during the six months ended March 31, 2014, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

Our financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates we use to prepare the consolidated financial statements. We base our estimates on historical experiences and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. 24



The Company has identified the accounting policies below as critical to our business operations and the understanding of our results of operations.

Principles of consolidation - The accompanying consolidated financial statements include the accounts of Boomerang Systems, Inc. and the accounts of all majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents- For purposes of the statement of cash flows, we consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Accounts receivable and allowance for doubtful accounts- Trade receivables are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We determine this allowance based on known troubled accounts, history and other currently available evidence. We have no allowance for doubtful accounts for the periods ending March 31, 2014 and September 30, 2013, respectively. Property and equipment - Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Costs of major additions and betterments are capitalized. Depreciation is calculated on the straight-line method over the estimated useful lives which range from three years to fifteen years. Depreciation and amortization for the six months ended March 31, 2014 and 2013 was $146,666 and $199,242, respectively.



Research and development - Pursuant to ASC 730, Research and Development, research and development costs are expensed as incurred. Research and Development expense for the six months ended March 31, 2014 and 2013 were $74,125 and $1,624,727, respectively.

Inventories - Inventories consisting of parts, materials, and assemblies are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Stock-based compensation - We adopted ASC 718-10-25, using the modified-prospective-transition method on February 7, 2008. Under this method, we are required to recognize compensation cost for stock-based compensation arrangements with employees and directors based on their grant date fair value using the Black-Scholes option-pricing model, such cost to be expensed over the compensations' respective vesting periods. For awards with graded vesting, in which portions of the award vest in different periods, we recognize compensation costs over the vesting periods using the straight-line method. For calculating the value for warrants, the Black-Scholes method is also used. Inherent in determining the fair value of options are several judgments and estimates that must be made. These include determining the underlying valuation methodology for share compensation awards and the related inputs utilized in each valuation, such as our expected stock price volatility, expected term of the options granted to employees and consultants, expected dividend yield, the expected risk-free interest rate, the underlying stock price and the exercise price of the option. Changes to these assumptions could result in different valuations for individual share awards. The company uses the Black-Scholes option pricing model to determine the fair value of options granted to employees, non-employee directors and non-employee consultants. Revenue recognition - Revenues from the sales of RoboticValet and rack and rail systems will be recognized using the percentage of completion method, whereby revenue and the related gross profit is determined by comparing the actual costs incurred to date for the project to the total estimated project costs at completion. Project costs generally include all material and shipping costs, our direct labor, subcontractor costs and an allocation of indirect costs related to the direct labor. Changes in the project scope, site conditions, staff performance and delays or problems with the equipment used on the project can result in increased costs that may not be billable or accepted by the customer and a loss or lower profit from what was originally anticipated at the time of the proposal. 25



Estimates for the costs to complete the project are periodically updated by management during the performance of the project. Provisions for changes in estimated costs and losses, if any, on uncompleted projects are made in the period in which such losses are determined.

When the current estimate of total contract costs exceeds the current estimate of total contract revenues, a provision for the entire loss on the contract is made. Losses are recognized in the period in which they become evident under the percentage-of-completion method. The loss is computed on the basis of the total estimated costs to complete the contract, including the contract costs incurred to date plus the estimated costs to complete. As of March 31, 2014, it was estimated that the gross loss on current contracts would be $782,407. This loss is comprised of $576,985 recognized through the percentage of completion method and $205,422 as a provision for the remaining loss on contracts for the six months ended March 31, 2014. Revenues of $3,336,863 and $289,234 have been recognized for the six months ended March 31, 2014 and 2013, respectively.



The Company may have service contracts in the future after the contract warranty period is expired, which are separate and distinct agreements from project agreements and will be billed according to the terms of the contract.

Warranty Reserves - The Company provides warranty coverage on its products for a specified time as stipulated in its sales contracts. As revenues for contracts are recognized, the Company will record a warranty reserve for estimated costs in connection with future warranty claims associated with those contracts. The amount of warranty reserve is based primarily on the estimated number of products under warranty and historical costs to service warranty claims. Management periodically assesses the adequacy of the reserves based on these factors and adjusts the reserve accordingly. The Company incurred warranty expenses relating to its completed projects of $4,893 and $0 for the six months ended March 31, 2014 and 2013, respectively. Earnings Per Common Share - We adopted ASC 260. The statement established standards for computing and presenting earnings per share ("EPS"). It replaced the presentation of primary EPS with a basic EPS and also requires dual presentation of basic and diluted EPS on the face of the income statement. Basic earnings (loss) per share is based on the weighted average number of common shares outstanding. Diluted earnings (loss) per share is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding.

Investment at Equity - The Company accounts for the equity investment using the equity method unless its value has been determined to be other than temporarily impaired, in which case we write the investment down to its impaired value. The Company reviews this investment periodically for impairment and makes appropriate reductions in carrying value when other-than-temporary decline is evident; however, for non-marketable equity securities, the impairment analysis requires significant judgment. During its review, the Company evaluates the financial condition of the issuer, market conditions, and other factors providing an indication of the fair value of the investment. Adverse changes in market conditions or operating results of the issuer that differ from expectation could result in additional other-than-temporary losses in future periods. Income Taxes - We account for income taxes under ASC 740-10. ASC 740-10 requires an asset and liability approach for financial reporting for income taxes. Under ASC 740-10, deferred taxes are provided for temporary differences between the carrying values of assets and liabilities for financial reporting and tax purposes at the enacted rates at which these differences are expected to reverse. The Company and its subsidiaries file a consolidated Federal income tax return. Use of Estimates - Management of the Company has made estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Estimates are used in accounting for, among other items, allowance for doubtful accounts, inventory obsolescence, warranty expense, income taxes and percentage of completion contracts. Actual results could differ from these estimates. Impairment of Long-Lived Assets - We review the long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine if impairment exists, we compare the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that an impairment exists, the carrying value of the asset is adjusted to the fair value. Factors considered in the determination of the fair value include current operating results, trends and the present value of estimated expected future cash flows. 26 Derivative liability - The Company accounts for reset provisions in connection with their issuance of debt, and reset provisions of equity instruments attached to their debt, in accordance with Emerging Issues Task Force ("EITF") Consensus No. 07-5 "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock" (EITF 07-5"). Under EITF 07-5, instruments which contain full ratchet anti-dilution provisions are no longer considered indexed to a company's own stock for purposes of determining whether it meets the first part of the scope exception in paragraph 11 (a) of FASB 133 "Accounting for Derivative Instruments and Hedging Activities", now promulgated in ASC 815, "Derivative and Hedging". Under ASC 815 the Company is required to (1) evaluate an instrument's contingent exercise provisions and (2) evaluate the instrument's settlement provisions. Fair Value Measurements - As defined in ASC Topic 820 - 10, "Fair Value Measurements and Disclosures," fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 - 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. As required by ASC Topic 820 - 10, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.



CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996

This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on our current expectations and projections about future events and conditions affecting our business, the markets for our products and customer acceptance of our products and conditions in the construction industry. Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports, statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate and intend to operate. These forward-looking statements may be identified by the use of terms and phrases such as "believes", "can", "could", "estimates", "expects", "forecasts", "intends", "may", "plans", "projects", "targets", "will", "anticipates", and similar expressions or variations of these terms and similar phrases. Comments about our critical need for additional capital and our ability to raise such capital when and as needed and on acceptable terms are forward-looking statements. Additionally, statements concerning future matters such as the costs and expenses we expect to incur, our ability to realize material revenues, delays we may encounter in selling our products and gaining market acceptance for our products, the cost of the further development of our products, and achieving enhancements or improved technologies, achieving material sales levels, marketing expenses, projected cash flows, our intentions regarding raising additional capital and when additional capital may be required, and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under Item 1A - Risk Factors on our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, as well as those discussed elsewhere in this Form 10-Q. The cautionary statements should be read as being applicable to all forward-looking statements wherever they appear in this Form 10-Q and they should also be read in conjunction with the consolidated financial statements, including the related footnotes. Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. All forward-looking statements in this Form 10-Q are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this Form 10-Q. Certain information included in this Form 10-Q may supersede or supplement forward-looking statements in our other Exchange Act reports filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.


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