NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ended December 31, 2014.
The Company's 10-K for the year ended December 31, 2013 should be read in conjunction with this report.
RECLASSIFICATIONS: Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
NATURE OF OPERATIONS AND ORGANIZATION: Signal Advance, Inc. (the Company) is currently conducting operations. Signal Advance, Inc., incorporated in Texas on June 4, 1992, is an engineering product and procedure development and consulting firm focused on the development of applications for emerging technologies. The Company has significant experience in computer technology, distributed information systems, and data acquisition and analysis systems, as well as, medical education, intellectual property protection and medical-legal litigation support. The Company has focused its resources on the improvement of signal detection systems through the development and refinement of its proprietary "Signal Advance" technology which has potential application in a wide range of medical applications, as well as applications outside of biomedicine.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
INTANGIBLE ASSETS OR LONG LIVED ASSETS: The Company anticipates amortizing intangible assets over their estimated useful lives unless such lives are deemed indefinite. Amortized intangible assets are tested for impairment based on undiscounted cash flows, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment and written down to fair value as required. No impairment of intangible assets has been identified during any of the periods presented (FASB ASC 350-30).
F 4
USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
The Company's financial statements include amounts and all adjustments that, in the opinion of management and based on management's best estimates and judgments, are necessary to make the financial statement not misleading. Actual results could differ from those estimates.
AVAILABLE FOR SALE SECURITIES: The Company holds certain investments that are treated as available-for-sale securities (FASB ASC 320-10-25) and stated at their fair market values. All investments are available for current operations and are classified as other assets in the balance sheet. Unrealized holding gains and losses are included as a component of other comprehensive income (loss) until realized (FASB ASC 320-35-1). Realized gains and losses are determined by the specific identification method and are included in 'Other Income (Loss)' in the income statement.
INVESTMENTS IN A LIMITED LIABILITY COMPANY: The Company holds an minor investment (3%) in a Limited Liability Company (LLC). The equity method of accounting for investments in general partnerships is generally appropriate for accounting by limited partners for their investments in limited partnerships. The Company's interest is so minor as a limited partner that the Company has virtually no influence over the operating and financial policies of the LLC. As such, accounting for the investment using the cost method is appropriate. Under the cost method, income recognized by the investor is limited to distributions received, except that distributions that exceed the investor's share of earnings after the date of the investment are applied to reduce the carrying value of the investment (FASB-ASC 970-323-25).
Adjustments are made for impairment annually based on the most recent K-1 Schedule provided by the LLC and no such adjustment for impairment was made during the six month period ended June 30, 2014.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as incurred until technological feasibility can be determined (FASB ASC 730-10-25). Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval, marketability, licensing, lease, or sale when the net present value and useful life is able to be determined. Payments made to third parties subsequent to the aforementioned events will be capitalized. Amounts capitalized for such payments will be included in other intangibles, less the net of the accumulated amortization, once their useful lives can be determined.
REVENUE RECOGNITION: The Company revenues are generated by: 1) Providing consulting services; 2) Licensing intellectual property; and 3) Providing consulting services to licensees to facilitate implementation. Revenue is not recognized until it is realized or realizable and earned (FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, paragraphs 83-84). In accordance with ASC 605, 'Revenue Recognition,' the company recognizes as revenue the fees charged clients as referenced below because 1) persuasive evidence of an arrangement exists, 2) the fees charged as royalties and/or for services are substantially fixed or determinable during the period in which services are provided or royalties are collected, 3) the company and its clients understand the specific nature and terms of the agreed upon transactions, and 4) collectability is reasonable assured after services have been rendered, or according to a royalty payment schedule.
F 5
Consulting Revenue – For revenues generated by providing engineering, scientific and medical/legal consulting services. Services are charged at an hourly rate and clients are charged and revenue is recognized monthly.
License Revenue - As part of the Company's business model and as a result of the company's on-going investment in research and development, the company plans to license and sell the rights to certain of its intellectual property (IP) including internally developed patents, trade secrets and technological know-how. The typical license will call for a non-refundable initiation fee, escalating minimum royalties to be paid before a given product is marketed, and continuing royalties based on gross sales once marketing has begun, confirmed by annual audits. The license will also include a set amount of time for consulting. Licensees will also be required to participate in patent maintenance and defense.
Certain transfers of IP to third parties may be licensing/royalty-based, transaction-based, or other forms of transfer. Licensing/royalty-based fees involve transfers in which the company earns the income over time, as a lump-sum payment or the amount of income is not fixed or determinable until the licensee sells future related products (i.e., variable royalty, based upon licensee's revenue). Accordingly, following delivery and or legal conveyance of rights to the aforementioned IP to the client, and following inception of the license term, revenue is recognized in a manner consistent with the nature of the transaction and the earnings process.
Combined License/Consulting Revenue - in certain circumstances the license agreement will also include consulting services to facilitate the use of the Company's IP, in which case the arrangement may include multiple deliverables. If the client is dependent on the consulting services of the Company to bring value to the license then the license and consulting services will be considered a single unit of accounting. If, however, the license has value to the client, independent of the consulting services provided by the Company, then each deliverable has value on a standalone basis. As such each delivered item or items shall be considered a separate unit of accounting (FASB ASC 605-25).
Alternatively, license terms may contain a citation of milestones of achievement by the licensee. Each milestone may be tied to an increase in the minimum royalty. For example, biomedical milestones may include completion of animal trials, submission and then approval of 510K applications or pre-market approval by the FDA. Each licensee pursuing a biomedical application will be expected to develop its own clinical data to secure such pre-market notification (510k) or approval. Under these circumstances, the deliverable, or unit of accounting, consideration may be contingent on the substantive achievement of one or more milestones. As such, revenue is recognized in its entirety in the period in which the milestone is achieved (FASB ASC 605-28).
During the Interim six month period ended June 30, 2014, the Company recognized no revenue. During the Interim six month period ended June 30, 2013, the Company recognized $1,000 in revenue.
PROPERTY AND EQUIPMENT: Fixed Assets (land, buildings and equipment) are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is provided using the straight line method. In the case of disposals, assets and related depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.
F 6
INCOME TAXES: The Company takes an asset and liability approach to financial accounting and reporting for income taxes. The difference between the financial statement and tax basis of assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce the deferred tax asset to the amount that will assure full realization (FASB ASC 740). As of June 30, 2014, the Company recorded a valuation allowance that reduced its deferred tax assets to zero.
CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject the Company to significant concentrations of credit risk consist primarily of investment securities. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities can occur in the near term and that each change could materially affect the amounts reported in the financial statement.
GOING CONCERN: The Company is currently conducting operations. However, it has not yet generated sufficient operating revenue to fund its development activities to date. As such, the Company has relied on funding by the Company's President and the sale of its common stock. There is a substantial doubt that the Company will generate sufficient revenues in future years to meet its operating cash requirements. Accordingly, the Company's ability to continue operations in the short-term depends on its success in obtaining equity or debt financing in an amount sufficient to support its operations. This could raise doubt as to its ability to continue as a going concern. The financial statements do not include any adjustments that might result from this uncertainty.
NOTE B - INTELLECTUAL PROPERTY
Intellectual property protection is being pursued for the specifically identifiable intellectual property (IP) termed Signal Advance technology. The following table lists the patent applications and issued patents and their respective status:
|
Patent Office
|
|
Patent or Appl. No.
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|
Status
|
|
United States
|
|
8452544
|
|
Issued May 2013
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|
China
|
|
ZL 200880015288.2
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|
Issued Nov. 2012
|
|
Europe
|
|
EP 08 75 4879.8
|
|
Under examination
|
|
Mexico
|
|
MX/A/2009/00921
|
|
Claims Allowed
|
|
India
|
|
3465/KOLNP/2009
|
|
Not yet examined
|
Additional patent submissions related to specific applications, SA circuit configurations, and signal processing techniques are in preparation.
The IP derives from an assignment of the IP in the form of a patent application filed with the USPTO as well as any patents which issue as a result of U.S. and related international patent applications.
F 7
As ASSIGNEE, the Company is responsible for:
1) funding and executing activities required for any regulatory approval, development, implementation and commercialization;
2) introducing assigned products which incorporate the patent pending or patented technology to the commercial market;
3) make its best efforts to:
a) develop and market assigned products and services, and
b) increase and extend the commercialization of assigned products, and
4) commence the advertising and marketing assigned products not later than 24 months following the granting of the patent
The assignment was privately negotiated between the Company's President, Dr. Hymel (Assignor) and the remaining members of the board of directors for the Company (Assignee). Consideration to acquire the IP rights, in the form of equity (specifically 1,525,000 shares of SAI common stock, to date) was expensed as the assignment is considered a transaction between entities under common control (FASB ASC 805-50-30-5,6). The value of the common stock issued in exchange for the equity was based on the most recent private sales of stock (FASB ASC 505-50-30-6). In addition, royalties are payable to Assignor on net sales and/or license fees as follows: a) <$10M: 6%; b) $10-$25M: 8%, and c)>$25M: 10%. Assignor's remedy for non-payment is the termination of the assignment.
The costs incurred in acquiring the assignment of the Signal Advance IP as well as the pursuit of domestic and international patent and trademark protection are expensed (included as "Intellectual Property Protection" under expenses on the Statements of Operations for the interim six month periods ended June 30, 2014, and 2013. These costs include expenses to prepare and prosecute patent applications and protect the IP, include filing and issuance fees, fees for consultants, experts, advisors, patent attorneys, including foreign associates, patent applications, claims and other amendments, responses to office actions, etc. Any patent infringement case may hinder the Company's ability to generate revenues.
NOTE C - AVAILABLE FOR SALE SECURITIES
Cost and fair value of available for sale securities (acquired Jan. 10, 2011) as of June 30, 2014 are as follows:
|
|
|
Cost Gross
|
|
|
Gain(Loss)
|
|
|
Fair Value
|
|
|
Equity Securities Available for Sale
|
|
$
|
25,000
|
|
|
|
(25,000
|
)
|
|
|
-0-
|
|
NOTE D – PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2104 and December 31, 2013 are summarized as follows:
|
|
|
Jun. 30, 2014
|
|
Dec. 31, 2013
|
|
|
Cost / Basis
|
126,467
|
|
125,807
|
|
|
Accumulated depreciation
|
(122,714)
|
|
(121,884)
|
|
Total property and equipment, net
|
3,753
|
|
3,923
|
Depreciation expense during the six months ended June, 2014 and 2013 were $830 and $1,354, respectively.
F 8
Note E – LINE OF CREDIT - SHAREHOLDER
The President has loaned funds to the Company under the terms of a Line of Credit Promissory Note negotiated with, and approved by, the Board of Directors. The line of credit is due on demand, unsecured, and bears interest at 2.5% annum.
On February 28, 2014 the Company repaid $100,000 of the loan payable with 100,000 shares of the Company's common stock valued at $100,000, the remaining balance payable was $54,175 including accrued interest of $2,000 as of June 30, 2014.
NOTE F - FACILITIES LEASE
The Company currently leases office space, from its president, on a month to month basis at a rate of $700 per month.
Rental expense amounted to $4,200 for the six month periods ended June 30, 2014 and 2013.
NOTE G – EQUITY
During the six months ended June 30, 2014 the Company issued 52,000 shares of common stock to various individuals for cash proceeds of $52,000.
On February 28, 2014 the Company repaid $100,000 of the loan payable with 100,000 shares of the Company's common stock valued at $100,000, the remaining balance payable was $54,175 including accrued interest of $2,000 as of June 30, 2014.
On April 1, 2014, the Company issued 100,000 shares of common stock valued at $100,000 to a consultant for services.
During the six months ended June 30, 2014 the Company issued 25,000 shares of common stock valued at $25,000 to members of the Board of Directors for services.
NOTE H – SUBSEQUENT EVENTS
Subsequent to the six months ended June 30, 2014 the Company issued 53,000 shares of common stock to two individuals for cash proceeds of $79,500.
On July 1, 2014, the Company issued 25,000 shares of common stock valued at $25,000 to a consultant for services.
On July 1, 2014, the Company repaid $50,000 of the shareholder line of credit with 50,000 shares of the Company's common stock valued at $50,000.
F 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this quarterly report. This report may contain forward-looking statements which relate to future events or our future financial performance. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "plan," "approximate" or "continue," or the negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. Unless the context requires otherwise, the terms 'Company,' 'SAI,' 'SA,' 'we,' 'our,' and 'us' refer to Signal Advance Inc., a Texas corporation formed on June 4, 1992. Our unaudited financial statements are stated in United States Dollars and are prepared in accordance with U.S. Generally Accepted Accounting Principles.
RESULTS OF OPERATIONS
We have incurred recurring losses to date. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.
Our auditors have issued a going concern opinion as the Company has generated insufficient revenues to fund planned R&D, marketing and intellectual protection in the near-term. SAI will continue to rely on capital investment to cover the projected costs to execute the Company's business plan and commercialize its proprietary signal advance technology. We expect we will require additional capital to meet our long term operating requirements. We anticipate raising additional capital through, among other things, the sale of equity or debt securities. There is no assurance that the Company will be able to raise the required capital which would result in operations being scaled back accordingly.
The majority of the Company's resources are devoted to technology development and protection of its proprietary technology aa well as raising the required capital to execute our business plan.
INCOME: In the interim six month period ended June 30, 2014 and 2013, the Company recognized no revenue and $1,000 in revenue, respectively.
EXPENSES: Expenses are classified into the following four broad categories: Depreciation, Intellectual Property Protection, Professional Services, R&D, and General, Selling and Administrative. SAI has engaged consultants to accomplish its goals over the last two years. Given sufficient capital, the majority of these consultants have expressed interest in working for us full-time. Professional Services includes expenses for accounting, legal, transfer agent and director's fees. The increase seen in expenses during the interim six month period ended June 30, 2014 and 2013 for Professional Services reflect expenses related to the registration of securities and fulfillment of reporting requirements with the Securities and Exchange Commission. Research and Development expenses reflect on-going efforts related to in scientific, technical and commercial validation, business development and investigation into specific applications for our proprietary technology.
Expenses for the interim six month period ended June 30, 2014 and 2013, were as follows:
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
General, Selling & Administrative
|
|
$
|
16,306
|
|
|
$
|
24,553
|
|
|
Intellectual Property Protection
|
|
|
8,910
|
|
|
|
1,020,333
|
|
|
Professional Services
|
|
|
176,417
|
|
|
|
28,301
|
|
|
Research and Development
|
|
|
4,000
|
|
|
|
15,000
|
|
|
Depreciation
|
|
|
830
|
|
|
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expense
|
|
$
|
206,463
|
|
|
$
|
1,089,541
|
|
LIQUIDITY AND CAPITAL ASSETS
CURRENT ASSETS: As of June 30, 2014 and December 31, 2013, the Company had cash and cash equivalents of $17,973 and $11,497. These assets are used as working capital to execute the Company's business plan. The Company requires additional capital through debt or equity financing to fund operations.
PROPERTY AND EQUIPMENT: Property and Equipment were $3,753 as June 30, 2014 and $3,923 as of December 31, 2013.
OTHER ASSETS: During the interim six month period ended June 30, 2014 and 2013, significant resources continued to be applied to intellectual property (IP) and protection. This includes 2) a milestone payment per the terms of the assignment agreement, 3) responses to preliminary searches and initial office actions from the international filings, 4) preparation/submission of amendments, additional disclosures 4) reviews of, and responses to, office actions to the Mexican patent office and 4) issuance and annual renewal fees. Patents have issued in China (Nov. 2012), the US (May 2013) and Mexico (Apr. 2014).
All costs associated with IP protection have been expensed. IP protection costs totaled $8,910 and $1,020,333, respectively, during the interim six month periods ended June 30, 2014 and 2013.
Results from an Available for Sale Security resulted in an unrealized loss of $13 as of June 30, 2014.
LIABILITIES: Liabilities include a line of credit from its President which was reduced to $54,175 by June 30, 2014 from $118,406 as of December 31, 2013 as the Company repaid $100,000 of the line of credit by issuing 100,000 shares of common stock.
SHAREHOLDERS' DEFICIT: Accumulated deficit totaled $4,439,915 and $4,233,452 on June 30, 2014 and December 31, 2013, respectively. The shares issued and outstanding as of June 30, 2014 and December 31, 2013, totaled 9,797,409 and 9,520,409, respectively.
OFF-BALANCE SHEET TRANSACTIONS: There are no off-balance sheet items, all transactions are in U.S. dollars, and SAI is not currently subject to currency fluctuations or similar market risks.
SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS: The Company considers highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
AVAILABLE FOR SALE SECURITIES: The Company holds certain investments that are treated as available-for-sale securities and stated at their fair market values. All investments are available for current operations and are classified as other assets in the balance sheet. Realized gains and losses are determined by the specific identification method and are included in 'Other Income (Loss)' in the income statement.
INVESTMENTS IN A LIMITED LIABILITY COMPANY: The Company holds a minor (3%) investment in a Limited Liability Company (LLC). The equity method of accounting for investments in general partnerships is generally appropriate for accounting by limited partners for their investments in limited partnerships. The Company's interest is so minor as a limited partner that the Company has virtually no influence over the operating and financial policies of the LLC. As such, accounting for the investment using the cost method is appropriate. Under the cost method, income recognized by the investor is limited to distributions received, except that distributions that exceed the investor's share of earnings after the date of the investment are applied to reduce the carrying value of the investment (FASB-ASC 970-323-25).
Adjustments are made for impairment annually based on the most recent K-1 Schedule provided by the LLC and no such adjustment for impairment was made during the six month period ended June 30, 2014.
RESEARCH AND DEVELOPMENT: Research and development expenses are expensed as incurred until technological feasibility can be determined. Upfront and mile stone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval, marketability, licensing, lease, or sale when the net present value and useful life is able to be determined. Costs associated with intellectual property protection have been expensed until such time as the useful can be determined, at which time, amounts capitalized will be included in intangible property, less the net of accumulated amortization.
REVENUE RECOGNITION: Revenue is not be recognized until it is realized or realizable and earned. An extended discussion regarding the sources of revenue expected as well as how revenue from these sources will be recognized can be found under 'Revenue Recognition' beginning on F5 of the Financial Statements.
PROPERTY AND EQUIPMENT: Property and equipment are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is provided using the straight line method. In the case of disposals, assets and related depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.
INCOME TAXES: The Company takes an asset and liability approach to financial accounting and reporting for income taxes. Differences between the financial statement and tax basis of assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce the deferred tax asset to the amount that will assure full realization. As of June 30, 2014, the Company recorded a valuation allowance that reduced its deferred tax assets to zero.
CONCENTRATIONS OF CREDIT RISK: Financial instruments which may subject the Company to significant concentrations of credit risk consist primarily of investment securities. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities can occur in the near term and that such change could materially affect the amounts reported in the financial statements.
INTANGIBLE ASSETS OR LONG-LIVED ASSETS: The Company amortizes intangible assets over their estimated useful lives unless such lives are deemed indefinite. Amortized intangible assets are tested for impairment based on undiscounted cash flows, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment and written down to fair value as required.
DEFERRED TAX ASSET: A valuation allowance was recognized for the full amount of the deferred tax asset because, based on the weight of available evidence, it is more likely than not that some portion or the entire deferred tax asset will not be realized.
NET LOSS PER SHARE: Basic loss per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.
PLAN OF OPERATION AND FUNDING
We anticipate that required working capital will continue to be funded through a combination of our existing funds and further issuances of securities. Working capital requirements will likley to increase in line with the business growth.
Existing working capital, further advances, debt instruments, and firm commitments are expected to be adequate to fund our operations over the next three months. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt instruments. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: i) technology development, ii) marketing and commercialization, and iii) intellectual property protection. We intend to finance these expenses with further issuances of securities, and debt issuances. Thereafter, we expect we will need to raise additional capital and generate revenues to meet long-term operating requirements.
Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Also, such securities may have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations.
MATERIAL COMMITMENTS: The Company currently leases office space, from its president, on a month to month basis at a rate of $700 per month.
PURCHASE OF SIGNIFICANT EQUIPMENT: We do not intend to purchase any significant equipment during the next six months.
Item 4. Controls and Procedures
MANAGEMENT'S REPORT ON DISCLOSURE CONTROLS AND PROCEDURES: Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that compliance with the policies or procedures may deteriorate. Management evaluated the effectiveness of the Company's internal control over financial reporting as of June 30, 2014 using the criteria established in 'Internal Control-Integrated Framework' issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of June 30, 2014, based on the above referenced guidelines, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.
1) We do not have an Audit Committee - While not being legally obligated to have an audit committee, it is the management's view that such a committee, including a financial expert member, is an important entity level control over the Company's financial statement. Currently the Board of Directors acts in the capacity of the Audit Committee, and does not include a member that is considered to be independent of management to provide the necessary oversight over management's activities.
2) We did not maintain appropriate cash controls - As of June 30, 2014, the Company has not maintained sufficient internal controls over financial reporting for the cash process, including failure to segregate cash handling and accounting functions, and did not require dual signature on the Company's bank accounts. Alternatively, the effects of poor cash controls were mitigated by the fact that the Company had limited transactions in their bank accounts.
3) We did not implement appropriate information technology controls - As of June 30, 2014, the Company retains copies of all financial data and material agreements and periodically make backups of the Company's data; however there is no formal procedure or evidence of normal backup of the Company's data or off-site storage of data in the event of theft, misplacement, or loss due to unmitigated factors.
Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company's internal controls. As a result of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2014 based on criteria established in Internal Control - Integrated Framework issued by COSO.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING: There has been no change in our internal control over financial reporting identified in connection with our evaluation we conducted of the effectiveness of our internal control over financial reporting as of June 30, 2014, that occurred subsequent to the evaluation that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the SEC applicable to an Emerging Growth Company that permit the Company to provide only management's report in this annual report.