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HPIL HOLDING and Subsidiaries

 

 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

 

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Operations

 

HPIL HOLDING and Subsidiaries (referred to in this report as “HPIL”, the “Company”, “us”, “our” or “we”) (formerly Trim Holding Group) was incorporated on February 17, 2004 in the state of Delaware under the name TNT Designs, Inc. A substantial part of the Company’s activities were involved in developing a business plan to market and distribute fashion products.

 

On June 16, 2009, the majority interest in the Company was purchased in a private agreement by Mr. Louis Bertoli, an individual, with the objective to acquire and/or merge with other businesses.

 

On October 7, 2009, the Company merged with and into Trim Nevada, Inc., which became the surviving corporation. The merger did not result in any change in the Company’s management, assets, liabilities, net worth or location of principal executive offices. However, this merger changed the legal domicile of the Company from Delaware to Nevada where Trim Nevada, Inc. was incorporated. Each outstanding share of TNT Designs, Inc. was automatically converted into one share of the common stock of Trim Nevada, Inc. Pursuant to the merger, the Company changed its name from TNT Designs, Inc. to Trim Holding Group and announced the change in the Company’s business focus to health care and environmental quality sectors. Afterwards the Company determined it no longer needed its inactive subsidiaries, and as such, all three subsidiaries were dissolved.

 

On May 21, 2012, the Company changed its name to HPIL HOLDING.

 

As of June 30, 2014, the Company has yet to commence substantial operations. Expenses incurred from February 17, 2004 (date of inception) through June 30, 2014 relate to the Company’s formation and general administrative activities. In the course of its start-up activities, the Company has sustained operating losses and expects to incur operating losses in 2014. The Company has generated a limited amount of revenue and has not achieved profitable operations or positive cash flows from operations. The report of the Company’s independent registered accounting firm on the Company’s consolidated financial statements as of and for the year ended December 31, 2013 included in the Company’s Form 10-K filed April 15, 2014, contained an emphasis of a matter paragraph stating that these factors and uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s auditors have not issued a report on the Company’s financial statements for any period after December 31, 2013. During 2014, the Company entered into a consulting agreement to provide consulting for a two year period beginning June 10, 2014 for $30,000 monthly and raised $350,000 in capital from the sale of preferred stock. The Company believes there is no longer a substantial doubt about its ability to continue as a going concern through at least June 30, 2015. The Company will continue targeting sources of additional financing to provide continuation of its operations, and the Company’s majority stockholder has indicated his ability to provide financial support to the Company, should it be necessary.  

 

HPIL HOLDING’s intends that its main activity will be in the business of investing in differing business sectors and has also entered into a consulting agreement to provide consulting services over the next two years.

 

To begin the implementation of the business plan, on September 10, 2012, Company organized six new subsidiary companies. Each of these subsidiary companies is wholly (100%) owned by the Company. The names of the new subsidiary companies were HPIL HEALTHCARE Inc., HPIL ENERGYTECH Inc., HPIL WORLDFOOD Inc., HPIL REAL ESTATE Inc., HPIL GLOBALCOM Inc. and HPIL ART&CULTURE Inc. These companies have been organized to implement the various growth strategies of the Company. HPIL HEALTHCARE Inc. has been organized to facilitate investments in the health care sector. HPIL ENERGYTECH Inc. has been organized to facilitate investments in the energy sector. HPIL WORLDFOOD Inc. has been organized to facilitate investments in the food sector. HPIL REAL ESTATE Inc. has been organized to facilitate investments in the real estate sector. HPIL GLOBALCOM Inc. has been organized to facilitate investments in the communication sector and HPIL ART&CULTURE Inc. has been organized to facilitate investments in the art and culture sector. We intend to make such investments in the United States and worldwide if adequate candidates can be identified.

 

A concentration of the Company has become the development of the IFLOR Business to produce a “Massage Vibrator for the Relief of Aches and Pain” product through our subsidiary, HPIL HEALTHCARE Inc.  We are in the planning stages of our marketing efforts and hope to generate interest in the product through existing strategic cooperation agreements and other consumer outreach and feedback.  The Company began design and molding of the product during 2013 and we expect to complete production of IFLOR Device samples and packaging mock ups by late 2014 for market testing.  Due to various circumstances, such as the unknown definitive completion date of product sample manufacturing and ongoing evaluations being conducted by the Company regarding our prior marketing efforts, expected product demand, product manufacturing and rollout schedules, we cannot currently determine with confidence when we expect to commence operations with respect to production of the IFLOR Device.

 

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Basis of Presentation

 

The accompanying Condensed Consolidated Financial Statements (the “Financial Statements”) have been prepared by management in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2013, included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014. Additionally, our operating results for the six months ended June 30, 2014 are not necessarily indicative of the results that can be expected for the year ending December 31, 2014 or for any other period.

 

As of June 30, 2014 none of the above subsidiaries have reached full operations.

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

                             

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

 

Investment in Unconsolidated Affiliate

 

The Company utilizes the equity method of accounting, as prescribed by ASC Topic 323 “Investments – Equity Method and Joint Ventures”, when it is able to exercise significant management influence over the entity’s operations, which generally occurs when HPIL has an ownership interest of between 20% and 50% in an entity. The cost method of accounting is used when the Company does not exercise significant management influence, generally when HPIL has an ownership interest of less than 20%. The Company’s 32% investment in Haesler Real Estate Management SA (“HREM”) is accounted for under the equity method of accounting. As of June 30, 2014, the carrying amount of the investment is equal to the Company’s equity interest of the carrying amount of the net assets of HREM.

 

Use of Estimates

 

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from these estimates.

 

Income Taxes

 

The Company accounts for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions in accordance with ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes”. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all federal or state income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.

 

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As of June 30, 2014 and December 31, 2013 there were no amounts that are required to be accrued in respect to uncertain tax positions.

 

The Company’s tax returns are not currently under examination by the Internal Revenue Service (“IRS”) or state authorities. However, fiscal years 2010 and later remain subject to examination by the IRS and respective states.  Fiscal years 2011, 2012 and 2013 tax returns have not yet been filed, and will be subject to examination by the IRS for up to three years after they are filed, and up to four years for the respective states.

 

Property and equipment

 

The Company’s property and equipment consists of molds and designs not yet being used in operations at June 30, 2014.  Once placed into operations, the Company will depreciate these assets over their estimated useful lives, expected to range between 5 and 10 years.  For the quarters ended June 30, 2014 and 2013, the Company has not recorded any depreciation expense related to these assets as they are not yet placed in service.

 

Long-Lived Assets

 

The carrying value of long-lived assets is reviewed annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company considers internal and external factors relating to each asset, including cash flow, market developments, and other publicly available information. If these factors indicate that the asset will not be recoverable, the carrying value will be adjusted to the estimated fair value.

 

Net Loss per Share

 

Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period and the number of shares of common stock issuable upon assumed exercise of preferred stock provided the result is not anti-dilutive.

 

For the quarters ended June 30, 2014 and 2013, 50,000 shares and 0 shares, respectively, of potentially dilutive securities from the sale of convertible preferred stock were not included in the computation of loss per share due to the net losses.

 

Recently Issued Accounting Pronouncements

 

Management has reviewed and recently issued accounting pronouncements and determined that ASU 2014-10 is relevant to the reporting requirements for the Company.  As a result, the Company adopted ASU 2014-10 “Development Stage Entities” (Topic 915) effective January 1, 2014.  The amendments in this Accounting Standards Update no longer require statements to include the definition of a developmental stage company.  In addition, there is no longer a requirement to include 1) inception-to-date information in the statements of income, cash flows, and shareholder equity, 2) label the financial statements as those of a development stage entity, 3) disclose a description of the development stage activities in which the entity is engaged, or 4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.

 

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers.  This new standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under GAAP.  The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016.  The Company is currently evaluating the impact of the provisions of this new standard on our consolidated financial statements.  None of the other recently issued accounting pronouncements are expected to significantly affect the Company.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence that an arrangement or contract exists, delivery has occurred, the service provider’s fees are fixed and determinable, and collectability is probable or certain.  Revenue is recognized for services as rendered.

 

NOTE 3 – NOTE AND ADVANCES PAYABLE - STOCKHOLDER

 

During 2012 the Company, in agreement with the Company’s majority stockholder, cancelled its 22,000 shares of Preferred Stock Series 1 Class P-1 outstanding in exchange for a note payable of $192,500.  The note was non-interest bearing and was repaid during the year ended December 31, 2013.  During the year ended December 31, 2013, the stockholder made additional advances to the Company under the same terms, which advances were repaid during the year ended December 31, 2013.  The Company has $Nil payable to this stockholder as of June 30, 2014 and December 31, 2013, respectively.

 

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NOTE 4– CAPITAL STOCK

 

On June 28, 2012, pursuant to the terms of a Patent Purchase Agreement made by and between the Company and GIOTOS Ltd. (“GIOTOS”), we issued 100,000,000 shares of common stock to GIOTOS, a company owned and controlled by Mr. Louis Bertoli. The number of shares issued and the purchase price were subject to a valuation of the common stock and of certain patents rights and other related business processes and know-how (“IFLOR Business”), and were to be adjusted based upon the these fair values. The Company subsequently obtained the expected third-parties valuations of the common stock and of the IFLOR Business (the “Valuations”).  Based on the Valuations, the Company exercised its right to adjust the amount of shares pursuant to the terms of the Stock Purchase Agreement. 

 

On April 12, 2013, we executed a Closing Agreement with GIOTOS to reduce the purchase price to $12,500,000, and to effect the share adjustment and return 50,000,000 shares to the Company.  As both entities are majority owned and controlled by Mr. Bertoli, assets acquired in transactions between entities under common control should be recorded at the current carrying value of the seller. Increasing the carrying value of the assets acquired to estimated fair value is not permitted under these circumstances. Based on the foregoing, the Company has not recorded any carrying value for the acquired patents rights related to the IFLOR Business. Accordingly, the difference between the transaction price and the value of the assets recorded has been recorded in equity as a capital transaction whereby the 50,000,000 shares issued as consideration were recorded to common stock at par value with the offset recorded to additional paid-in capital.

 

On February 27, 2013, the Company entered into a Stock Purchase Agreement with an accredited investor, pursuant to which Company agreed to sell and investor agreed to purchase 16,000 shares of Common Stock of the Company for a total purchase price of $81,600. On March 7, 2013, pursuant to the terms and conditions of the Agreement, the Company issued the shares to the investor in exchange for the purchase price.

 

On July 27, 2013, the Company entered into a Stock Purchase Agreement with an accredited investor, pursuant to which Company agreed to sell and investor agreed to purchase 165,000 shares of Common Stock of the Company for a total purchase price of $899,250. On August 2, 2013, pursuant to the terms and conditions of the Agreement, the Company issued the shares to the investor in exchange for the purchase price.

 

On November 20, 2013, the Company entered into a Stock Purchase Agreement with an accredited investor, pursuant to which Company agreed to sell and investor agreed to purchase 60,000 shares of Common Stock of the Company for a total purchase price of $360,000. On November 27, 2013, pursuant to the terms and conditions of the Agreement, the Company issued the shares to the investor in exchange for the purchase price.

 

On June 12, 2014, the Company entered into a Stock Purchase Agreement with an accredited investor, pursuant to which Company agreed to sell and investor agreed to purchase 50,000 shares of Convertible Preferred Stock Series 1 Class P-2 of the Company at the par value of $7.00 each for a total purchase price of $350,000.  On June 24, 2014, the Company issued the shares to the investor in exchange for the purchase price.  As provided in the articles of incorporation of the Company, the holders of the Convertible Preferred Stock Series 1 Class P-2 may convert, at any time, their preferred stock in whole or part, into shares of Common Stock. Each one (1) share of Preferred Stock Series 1 Class P-2 is convertible into one (1) share of Common Stock. This beneficial conversion feature (“BCF”) has an intrinsic value at the issuance date of $66,000, and is recorded as a preferred dividend to the preferred stockholder.

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

The Company’s wholly owned subsidiary HPIL HEALTHCARE Inc. uses the service of MB Ingenia SRL (“MB Ingenia”) for the production of the "Massage Vibrator for the Relief of Aches and Pain". HPIL HEALTHCARE Inc. made property and equipment purchases from MB Ingenia totaling $24,193 for the six months ended June 30, 2014 and $91,137 for the six months ended June 30, 2013. Mr. Bertoli was the President and CEO of MB Ingenia until November 28, 2013, at which time Mr. Bertoli’s brother became President and CEO of MB Ingenia. Mr. Bertoli also serves as an executive officer and director of our Company.

 

The Company had advances receivable from MB Ingenia of $241,746 as of June 30, 2014 for the production of the IFLOR units.  These advances are non-interest bearing.  The Company also had advances receivable from HREM as of June 30, 2014 totaling $100,000.  These advances are non-interest bearing and due on demand.

 

The Company uses MB Ingenia for various corporate business services, including technical support and engineering services related to the IFLOR Device and use of office space by Mr. Bertoli.  For the six months ended June 30, 2014 and 2013, the Company incurred expenses of $24,910  and $24,548, respectively, in relation to these services.

 

On July 20, 2009, the Company entered into a two-year consulting agreement with Amersey Investments LLC (“Amersey”), a company controlled by a director and the CFO of the Company, Mr. Nitin Amersey.  Amersey will continue to provide office space, office identity and assist the Company with corporate, financial, administrative and management records. For the six months ended June 30, 2014 and 2013, the Company incurred expenses of $30,000  and $33,020, respectively, in relation to these services.

 

The Company uses Bay City Transfer Agency & Registrar Inc. (“BCTAR”) to do its stock transfers.  Mr. Amersey is listed with the Securities and Exchange Commission as a control person of BCTAR. For the six months ended June 30, 2014 and 2013, the Company incurred expenses of $3,147  and $1,525, respectively, in relation to these services.

 

The Company uses the services of Freeland Venture Resources LLC, for Edgar filings.  Mr. Amersey is a control person in Freeland Venture Resources LLC. For the six months ended June 30, 2014 and 2013 the Company incurred expenses of $7,610 and $3,640, respectively, in relation to these services.

 

The Company uses the services of Cheerful Services International Inc. (“Cheerful”) for corporate press releases.  Cheerful is owned by Mr. Amersey’s children. For the six months ended June 30, 2014 and 2013, the Company incurred expenses of $3,730 and $5,160, respectively, in relation to these services.

 

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NOTE 6 – INCOME TAXES

 

The effective tax rate of 0% differs from the statutory rate of 34% due to the Company recording a valuation allowance against the future tax benefit of current period losses.  Management is unable to conclude the related deferred tax assets are more likely than not to be realized due to the recurring losses.

 

NOTE 7 – OTHER INFORMATION

 

The Company entered into a service and consulting agreement between HPIL ENERGYTECH and O.R.C. SRL, a private limited company domiciled in Italy for a two year period beginning June 10, 2014 to render consulting services to O.R.C. SRL in consideration of a monthly fee of $30,000.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

Forward Looking Statements

                

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements generally are identified by the words “believes”, “project”, “expects”, “anticipates”, “estimates”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will be”, “will continue”, “will likely result”, and similar expressions.  We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.  Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles.  These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

 

Overview

 

 

HPIL HOLDING and Subsidiaries (collectively, “we”, “us”, “our”, or the “Company”) is an early stage company originally incorporated on February 17, 2004 in the state of Delaware under the name TNT Designs, Inc.  On October 7, 2009, we merged with and into Trim Nevada, Inc., a Nevada corporation, for the purpose of changing our domicile from Delaware to Nevada.  As part of the merger, we changed our name to Trim Holding Group.

 

On May 22, 2012, we changed our name to HPIL HOLDING to more fully reflect our current business operations.

 

On July 18, 2012, we changed our business plan to focus on making investments in companies, whether they are public or private enterprises in differing business sectors.  The Company does not restrict the target companies to any specific business, industry or geographical location and thus seeks to acquire a variety of businesses.  Such investments may be made in the United States and worldwide.  Further the Company will evaluate the acquisition of intellectual properties and technologies for investment, with a particular interest in the healthcare and environmental quality sectors.

 

On September 10, 2012, Company organized six new subsidiary companies. Each of these subsidiary companies is wholly owned (100%) by the Company. The names of the new subsidiary companies are HPIL HEALTHCARE Inc., HPIL ENERGYTECH Inc., HPIL WORLDFOOD Inc., HPIL REAL ESTATE Inc., HPIL GLOBALCOM Inc. and HPIL ART&CULTURE Inc. These companies were organized with the intention of satisfying the various growth strategies of the Company.

 

HPIL HEALTHCARE Inc. was organized to facilitate investments in the health care sector. HPIL ENERGYTECH Inc. was organized to facilitate investments in the energy sector. HPIL WORLDFOOD Inc. was organized to facilitate investments in the food sector. HPIL REAL ESTATE Inc. was organized to facilitate investments in the real estate sector. HPIL GLOBALCOM Inc. was organized to facilitate investments in the communication sector and HPIL ART&CULTURE Inc. was organized to facilitate investments in the art and culture sector.

 

 

 

On June 10, 2014, HPIL Holding’s wholly owned subsidiary, HPIL ENERGYTECH Inc. (“HPIL ET”), entered into a Service and Consulting Agreement (the “Consulting Agreement”) with O.R.C. SRL (“O.R.C.”), a private company focused on investing in the energy sector.  Pursuant to the Consulting Agreement, beginning on June 10, 2014, HPIL ET will provide to O.R.C. certain consulting and other services (the “Services”), as more fully described in the Agreement.  In consideration of the Services provided by HPIL ET, O.R.C. is required to pay to HPIL ET consulting fees in the amount of USD $30,000 per month throughout the term of the Agreement, which is two (2) years unless terminated earlier by either party pursuant to the terms of the Agreement.

 

On June 12, 2014, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with an accredited investor (“Investor”), pursuant to which we agreed to sell and Investor agreed to purchase Fifty Thousand (50,000) shares of Preferred Stock Series 1 Class P-2 of the Company (the “Shares”) at the par value of $7.00 each for a total purchase price of Three Hundred Fifty Thousand and No/100 Dollars ($350,000) (the “Purchase Price”).  In accordance with the terms of the Purchase Agreement, we received the full amount of the Purchase Price on June 24, 2014 and issued the Shares to Investor on June 24, 2014.

 

 

We have continued to pursue our business plan of making investments in companies, as more particularly described in subsection (a) above, and expect that we will continue on that business plan for the foreseeable future.  Also, the Company will continue to concentrate on the development of the IFLOR business line to produce a “Massage Vibrator for the Relief of Aches and Pain” product (the “IFLOR Device”) through our subsidiary, HPIL HEALTHCARE Inc.  We are currently in the advanced planning stages of our marketing efforts and hope to continue generating interest in the IFLOR Device through existing strategic cooperation agreements and other consumer outreach and feedback.  Design and initial molding of the IFLOR Device is now complete and we have engaged an initial manufacturer to make product samples for further marketing and testing purposes.

 

The Company previously reported estimated production and distribution timelines based on potential customer relationship development and expected subsequent IFLOR Device orders at the time such estimates were reported.  As of the date of this Quarterly Report, the Company has yet to receive the expected orders for the IFLOR Device, which is a primary cause of delay in the Company’s production and distribution.  We continue to develop potential customer relationships and anticipate pursuing potential customer orders for the IFLOR Device throughout 2014.  We have recently commenced negotiations with a potential customer regarding a possible order of the IFLOR Device.  As of the date of this Quarterly Report, the terms on which we may supply the IFLOR Device are not finalized and negotiations with the potential customer are ongoing.  There is no assurance that these negotiations will result in the placement of any orders for the IFLOR Device, the execution of a contract between the Company and the potential customer or the generation of revenue for the Company.

 

In addition, we have commenced evaluations of the results of our past marketing efforts, anticipated demand for the IFLOR Device and strategic production efficiencies to meet projected demand.  We plan to continue these evaluations throughout 2014.  Based on early indications of these evaluations, we continue to develop an estimation of our target production needs for the IFLOR Device.  As of the date of this Quarterly Report, our production capacity is not sufficient to meet the currently anticipated target production needs.  Throughout the remainder of 2014, we plan to continue developing our production plans accordingly, including the potential engagement of additional manufacturers, evaluation of potential first party manufacturing capabilities, and the production of additional molds to increase production capacity in line with projected needs.

 

Our ability to meet our projected production and distribution goals with respect to the IFLOR Device may be adversely affected by a number of factors, some of which may include:

 

·        Our inability to generate customer orders for the IFLOR Device to a level necessitating scaled production and distribution of the IFLOR Device;

·        Our inability to produce a sufficient number of additional IFLOR Device molds to maintain necessary and efficient production of the IFLOR Device to keep up with projected demand;

·        Our inability to produce replacement IFLOR Device molds, if existing molds are broken or otherwise become unusable, to keep a sufficient number of molds in active production necessary to keep up with projected demand;

·        Changes in the current business plan, as set forth above, based on our current strategic market studies and evaluations or other unknown factors; or

·        Other factors that may affect our ability to reach necessary production capacity in an efficient manner, including, without limitation, acts of God, changes in labor laws, work stoppages, or inability to engage additional manufactures on satisfactory terms.

 

Due to various circumstances, such as the unknown definitive completion date of product sample manufacturing and ongoing evaluations being conducted by the Company regarding our prior marketing efforts, expected product demand, product manufacturing and rollout schedules, we cannot currently determine with confidence when we expect to commence operations with respect to production of the IFLOR Device.

 

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Liquidity and Capital Resources

 

We are an early stage company focused on developing our business in the Healthcare, Environmental Quality, Energy and Real Estate sectors.  Our principal business objective for the next twelve (12) months will be to continue to develop our business plan in these sectors and continue efforts to bring the IFLOR Device to market.  As we have not commenced material operations, we have not earned substantial revenues to date; however, we have recently begun generating revenues from the Consulting Agreement, as more fully described above under “Material Transactions”.

 

Net cash (used in) operating activities.  During the six months ended June 30, 2014, net cash used in operating activities was $(305,945) compared with $(213,298) used in operating activities for the six months ended June 30, 2013.  The cash flow used in operating activities in the six months ended June 30, 2014 was primarily the result of net operating losses.  The cash flow used in operating activities in the six months ended June 30, 2013 was primarily the result of net operating losses.

 

Net cash (used in) investing activities.  During the six months ended June 30, 2014, net cash used in investing activities was $(16,030) compared with $(154,302) used in investing activities for the six months ended June 30, 2013.  The cash flow used in investing activities in the six months ended June 30, 2014 was primarily the result of the acquisition of molds and designs for the business associated with the IFLOR Device, partially offset by repayments from related parties.  The cash flow used in investing activities in the six months ended June 30, 2013 was primarily the result of equipment purchases related to the IFLOR Device design and manufacturing.

 

Net cash provided by financing activities.  During the six months ended June 30, 2014, net cash provided by financing activities was $349,975 compared with $161,100 provided by financing activities for the six months ended June 30, 2013.  The cash flow provided by financing activities in the six months ended June 30, 2014 was primarily the result of proceeds from the issuance of the Company’s preferred stock.  The cash flow provided by financing activities in the six months ended June 30, 2013 was primarily the result of proceeds from the issuance of the Company’s common stock and advances from stockholders.

 

As of June 30, 2014, we had cash on hand of $429,723 and current liabilities of $13,400.

 

As of June 30, 2014, the Company has yet to commence substantial operations.  Expenses incurred from February 17, 2004 (date of inception) through June 30, 2014 relate to the Company’s formation and general administrative activities.  In the course of its start-up activities, the Company has sustained operating losses and expects to incur operating losses throughout 2014.  The Company has generated a limited amount of revenue and has not achieved profitable operations or positive cash flows from operations.

 

The report of the Company’s independent registered accounting firm on the Company’s consolidated financial statements as of and for the year ended December 31, 2013 included in the Company’s Form 10-K filed April 15, 2014, contained an emphasis of a matter paragraph stating that certain factors and uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.  The Company’s auditors have not issued a report on the Company’s financial statements for any period after December 31, 2013.  However, during 2014, the Company has entered into a consulting agreement to provide compensated consulting services over the next two years and raised $350,000 in capital from the sale of preferred stock.  As a result of these developments, the Company believes there is no longer a substantial doubt about its ability to continue as a going concern through at least June 30, 2015.

 

The Company will continue targeting sources of additional financing to provide continuation of its operations, and the Company’s majority stockholder has indicated his ability to provide financial support to the Company, should it be necessary.  Despite the aforementioned developments in the Company’s financial standing, there is no assurance that we will be able to achieve revenues sufficient to become profitable or that the Company will be able to continue to raise funds, in which case we may be unable to meet our obligations and we may cease operations.  The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

Results of Operations

 

As we are an early stage company, we are not yet engaged in material operational; therefore, we have little operations to report at this time. Our main focus has been on the development of our business plan.  Aside from the recent execution of the Consulting Agreement pursuant to which we will deliver certain consulting related services for a monthly fee (as described above under “Material Transactions”), we have made no sales and all expenses to date have related to the development of our business plan and other expenses related to the daily operations of a public company and beginning stages of business activities related to the IFLOR Device.

 

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Comparison of Three Months Ended June 30, 2014 to Three Months Ended June 30, 2013

 

Consulting Revenue.  Consulting revenue increased to $30,000 for the three months ended June 30, 2014, from nil for the three months ended June 30, 2013.  The increase in consulting revenue is primarily related to revenue generated pursuant to an agreement for energy sector consulting services provided by the Company which was executed and the term of which began in June 2014.

 

General and Administrative Expenses.  General and administrative expenses decreased to $165,881 for the three months ended June 30, 2014, from $171,013 for the three months ended June 30, 2013.  The decrease in general and administrative expenses is primarily related to decreased business activity related to the IFLOR Device.

 

Net Income (loss).  For the three months ended June 30, 2014, we incurred a net loss of $(135,881) as compared to a net loss of $(171,013) for the three months ended June 30, 2013.  The net loss was primarily a result of expenses incurred without generating sufficient revenue.  The decrease in the net loss was primarily a result of decreased general and administrative expenses and the addition of consulting revenue.

 

Comparison of Six Months Ended June 30, 2014 to Six Months Ended June 30, 2013

 

Consulting Revenue.  Consulting revenue increased to $30,000 for the six months ended June 30, 2014, from nil for the six months ended June 30, 2013.  The increase in consulting revenue is primarily related to revenue generated pursuant to an agreement for energy sector consulting services provided by the Company which was executed and the term of which began in June 2014

 

General and Administrative Expenses.  General and administrative expenses increased to $298,909 for the six months ended June 30, 2014 from $265,536 for the six months ended June 30, 2013.  The increase in general and administrative expenses is primarily related to increased business activity related to the IFLOR Device during the first quarter of 2014.

 

Net Income (loss).  For the six months ended June 30, 2014, we incurred a net loss of $(268,909) as compared to a net loss of $(265,536) for the six months ended June 30, 2013.  The net loss was primarily a result of expenses incurred without generating sufficient revenue.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements 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 and would be considered material to investors.

 

Inflation

 

We do not believe that inflation has had in the past or will have in the future any significant negative impact on our operations.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

As we are a smaller reporting company, we are not required to provide the information required by this item

 

Item 4.  Controls and Procedures.

 

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures and concluded that our disclosure controls and procedures are ineffective as of the date of filing this Form 10-Q due to limited accounting and reporting personnel and a lack of expertise and segregation of duties due to limited financial resources and the size of our company.  We will need to adopt additional disclosure controls and procedures prior to commencement of material operations. Consistent therewith, on an on-going basis we will evaluate the adequacy of our controls and procedures.

 

Management is committed to improving its internal controls and will continue to use third party specialists to address shortfalls in staffing and to assist the Company with accounting and finance responsibilities.  At this time, however, management has not established a time table for when it intends to address the aforementioned material weaknesses.

 

 

There were no changes in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II---OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

There are no legal proceedings that have occurred within the past five years concerning our directors or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one’s participation in the securities or banking industries, or a finding of securities or commodities law violations.

 

Item 1A.  Risk Factors.

 

As we are a smaller reporting company, we are not required to provide the information required by this item.

 

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

 

(a)          Unregistered Sales of Equity Securities. 

 

On June 12, 2014, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with an accredited investor (“Investor”), pursuant to which we agreed to sell and Investor agreed to purchase Fifty Thousand (50,000) shares of Preferred Stock Series 1 Class P-2 of the Company (the “Shares”) at the par value of $7.00 each for a total purchase price of Three Hundred Fifty Thousand and No/100 Dollars ($350,000) (the “Purchase Price”).  In accordance with the terms of the Purchase Agreement, we received the full amount of the Purchase Price on June 24, 2014 and issued the Shares to Investor on June 24, 2014.

 

The transaction described above and the shares of preferred stock involved were exempt from registration provided by Section 4(2) of the Securities Act.

 

(b)          Use of Proceeds. 

 

Not Applicable.

 

(c)          Affiliated Purchases of Common Stock. 

 

None.    

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures.

                

Not applicable.

 

Item 5.  Other Information.

 

None.

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Item 6. Exhibits.

                                            

INDEX TO EXHIBITS

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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