Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 – BASIS OF FINANCIAL STATEMENT
PRESENTATION
Klever Marketing, Inc. (the “Company”)
was created to develop, market and distribute an electronic shopping cart device for in-store advertising, promotion and media
content and retail shopper services and has not commenced its planned principal operations. The Company’s activities since
inception have consisted principally of developing various applications of its electronic shopping cart concept including its mobile
application for smart phones which the Company is currently testing in retail supermarkets, obtaining patents and trademarks related
to its technology, and raising capital. The Company’s activities are subject to significant risks and uncertainties including
failing to secure additional funding needed to finalize development of the Company’s technology and to commercialize its
product in a profitable manner.
The accompanying unaudited, condensed financial
statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles (“GAAP”) have been condensed or omitted in accordance with such rules and regulations. The information furnished
in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the
opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures
and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial
statements be read in conjunction with the Company's audited financial statements and notes thereto included in its December 31,
2015 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2016 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2016.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting
policies are described in the notes to the Company’s audited financial statements included its December 31, 2015 Annual Report
on Form 10-K.
Income (Loss) Per Common Share
Basic net income (loss) per share of common
stock is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share of common stock is computed by dividing net income (loss) by the sum of the weighted average
number of common shares outstanding and the dilutive potential common share equivalents than outstanding. Potential dilutive common
share equivalents consist of shares issuable upon exercise of outstanding stock options and the exercise of convertible preferred
stock.
For the three months ended March 31, 2016 and
2015, the Company incurred net losses; therefore, common stock equivalents related to the conversion of stock options and convertible
preferred stock have not been included in the calculation of diluted loss per common shares because they are anti-dilutive. Therefore,
basic loss per common share is the same as diluted loss per common share for both periods.
Reclassifications
Certain amounts in the 2015 condensed financial
statements have been reclassified to conform with the current year presentation.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified
effective date or earlier if allowed. If not discussed, management believes that the impact of recently issued standards, which
are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
There were no new accounting pronouncements
issued during the three months ended March 31, 2016 and through the date of this filing that we believe are applicable to or would
have a material impact on the condensed financial statements of the Company.
NOTE 3 – GOING CONCERN UNCERTAINTY
As shown in the accompanying condensed financial
statements, during the three months ended March 31, 2016 and 2015, the Company did not generate any revenue from product sales
and reported net losses of $80,492 and $88,756, respectively. As of March 31, 2016, the Company’s current and total liabilities
exceeded its current assets by $820,956. As of March 31, 2016, the Company had $25,563 of cash.
The Company will require additional funding
during the next twelve months to finance the growth of its current operations and achieve its strategic objectives. These factors,
as well as the uncertain conditions that the Company faces relative to capital raising activities, create substantial doubt as
to the Company’s ability to continue as a going concern. The Company is seeking to raise additional capital principally through
private placement offerings and is targeting strategic partners in an effort to finalize the development of its products and begin
generating revenues. The ability of the Company to continue as a going concern is dependent upon the success of future capital
offerings or alternative financing arrangements and expansion of its operations. The accompanying financial statements do not include
any adjustments that might be necessary should the Company be unable to continue as a going concern. Management is actively pursuing
additional sources of financing sufficient to generate enough cash flow to fund its operations through calendar year 2016. However,
management cannot make any assurances that such financing will be secured.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consist of the following:
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March 31,
2016
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December 31,
2015
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|
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|
|
|
|
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Capitalized software development costs
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$
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535,023
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|
|
$
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535,023
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|
Patents and trademarks
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147,225
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|
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133,601
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|
Accumulated amortization of patents and trademarks
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(60,707
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)
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|
(54,026
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)
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|
|
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|
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$
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621,541
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|
$
|
614,598
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|
The Company capitalizes software development
costs incurred from the time technological feasibility has been obtained until the product is generally released to customers.
Amortization of capitalized software development costs begins when the products are available to customers and is computed using
the straight-line method over the remaining estimated economic life of the product. Currently, the Company anticipates amortization
of software development costs to commence in fiscal year 2016. The Company achieved technological feasibility with regard to its
mobile phone technology during the fourth quarter of 2010. No software development costs were incurred and capitalized during the
three months ended March 31, 2016, and no amortization expense for software development costs was recorded for the three months
ended March 31, 2016 and 2015.
The costs of patents and trademarks are amortized
on a straight-line basis over 5 years from the date the patent or trademark is issued. Intangible assets with indefinite lives
are tested for impairment on an annual basis or when the facts and circumstances suggest that the carrying amount of the assets
may not be recovered. Amortization expense for patents and trademarks was $6,681 and $4,808 for the three months ended March 31,
2016 and 2015, respectively.
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consist of the following:
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March 31,
2016
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December 31,
2015
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|
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Compensation - officers and bookkeeper
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$
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369,125
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$
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330,125
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Taxes
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39,769
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39,474
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Accrued interest – related party
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|
319
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|
|
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953
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$
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409,213
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|
|
$
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370,552
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|
NOTE 6 – PREFERRED STOCK
Authorized Shares
In accordance with the Company’s bylaws,
the Company has authorized a total of 2,000,000 shares of preferred stock, par value $0.01 per share, for all classes. As of March
31, 2016 and December 31, 2015, there were 445,323 and 427,168 total preferred shares issued and outstanding for all classes, respectively.
As of March 31, 2016, all of the Company’s outstanding preferred shares are owned by a Company that is controlled by the
Company’s CEO.
Preferred Stock Dividends
As of March 31, 2016, the Company had
accrued and unpaid preferred stock dividends totaling $48,009 compared to $72,399 as of December 31, 2015. To date, all accrued
dividends for preferred stock have been authorized for payment through the issuance of preferred stock based on the ratios for
each class of preferred stock described below.
Class A Voting Preferred Stock
The Company has 150,000 shares of “Class
A Voting Preferred Stock” (“Class A Shares”) authorized. As of March 31, 2016 and December 31, 2015, there were
144,091 and 138,217 Class A Shares outstanding, respectively. Each Class A Share is convertible into 99.035 shares of common stock.
Holders of Class A Shares are entitled to receive dividends at the rate of $2.20 per share per annum, payable semi-annually. Dividends
are cumulative and may be paid in cash or in kind through the distribution of .0425 Class A Shares, Series 1, for each outstanding
Class A Share, on each dividend payment date. Class A Shares carry a liquidation preference of $26.00 per share plus any accrued
but unpaid dividends on such shares, if any, and adjusted for combinations, splits, dividends or distributions of shares of stock
with respect to such shares. Class A shares are redeemable by the Company, in whole or in part, at the option of the Board of
Directors of the Company, at any time.
Class B Voting Preferred Stock
The Company has 125,000 shares of “Class
B Voting Preferred Stock” (“Class B Shares”) authorized. As of March 31, 2016 and December 31, 2015, there were
109,209 and 104,757 Class B Shares outstanding, respectively. Each Class B Share is convertible into 64.754 shares of common stock.
Holders of Class B Shares are entitled to receive dividends at the rate of $1.70 per share per annum, payable semi-annually. Dividends
are cumulative and may be paid in cash or in kind through the distribution of .0425 Class B Shares for each outstanding Class
B Share, on each dividend payment date. Class B Shares carry a liquidation preference of $17.00 per share plus any accrued but
unpaid dividends on such shares, if any, and adjusted for combinations, splits, dividends or distributions of shares of stock
with respect to such shares. Class B shares are redeemable by the Company, in whole or in part, at the option of the Board of
Directors of the Company, at any time.
Class C Voting Preferred Stock
The Company has 200,000 shares of “Class
C Voting Preferred Stock” (“Class C Shares”) authorized. As of March 31, 2016 and December 31, 2015, there were
192,023 and 184,194 Class C Shares outstanding, respectively. Each Class C Share is convertible into 25.140 shares of common stock.
Holders of Class C Shares are entitled to receive dividends at the rate of $0.66 per share per annum, payable semi-annually. Dividends
are cumulative and may be paid in cash or in kind through the distribution of .0425 Class C Shares for each outstanding Class
C Share, on each dividend payment date. Class C Shares carry a liquidation preference of $6.60 per share plus any accrued but
unpaid dividends on such shares, if any, and adjusted for combinations, splits, dividends or distributions of shares of stock
with respect to such shares. Class C shares are redeemable by the Company, in whole or in part, at the option of the Board of
Directors of the Company, at any time.
NOTE 7 – COMMON STOCK
In accordance with the Company’s bylaws,
the Company has authorized a total of 250,000,000 shares of common stock, par value $0.01 per share. As of March 31, 2016 and December
31, 2015, there were 57,740,446 and 57,240,446 common shares issued and outstanding.
During the three months ended March 31, 2016,
the Company issued 500,000 shares of common stock to an investor for $25,000 cash.
During the three months ended March 31, 2015,
the Company issued 872,619 shares to investors for $52,500 cash. As more fully described in Note 7, one investor also received
options to purchase shares of the Company’s restricted common stock in connection with his investment in the Company.
NOTE 8 – STOCK OPTIONS
The Company’s shareholders approved,
by a majority vote, the adoption of the 1998 Stock Incentive Plan (the “Plan”). As amended on August 11, 2003, the
Plan reserves 20,000,000 shares of common stock for issuance upon the exercise of options which may be granted from time-to-time
to officers, directors, certain employees and consultants of the Company or its subsidiaries by the Board of Directors. The Plan
permits the award of both qualified and non-qualified incentive stock options.
During the three months ended March 31, 2016,
the Company did not issue any stock options. During the three months ended March 31, 2015, the Company issued 100,000 options with
an exercise price of $0.075 per share to an investor who simultaneously purchased common shares of the Company.
A summary of the Company’s stock
option awards as of March 31, 2016, and changes during the three months then ended is as follows:
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Shares
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|
Weighted
Average
Exercise Price
|
Weighted Average
Remaining
Contract Term
(Years)
|
Aggregate
Intrinsic
Value
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|
|
|
|
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Outstanding at December 31, 2015
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2,800,000
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$
|
0.050
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2.09
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Granted
|
-
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$
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–
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|
Exercised
|
-
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$
|
–
|
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|
Forfeited or expired
|
-
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$
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–
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Outstanding and
exercisable at
March 31, 2016
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2,800,000
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$
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0.050
|
1.84
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$ 2,800
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The aggregate intrinsic value in the preceding
table represents the total pretax intrinsic value, based on our closing stock price of $0.051 as of March 31, 2016, which would
have been received by the holders of in-the-money options had the option holders exercised their options as of that date.
NOTE 9 – RELATED PARTY TRANSACTION
The Company periodically receives funding from
officers and directors to fund operations. Jerry Wright, a director, advanced to the Company $30,000 during the year ended December
31, 2015. The Company repaid $4,500 of the advance, resulting in a related party note payable of $25,500 as of March 31, 2016 and
December 31, 2015 reported in the Company’s Condensed Balance Sheets. The related party note payable bears interest at the
rate of 6% per annum, and had accrued interest payable of $319 and $953 as of March 31, 2016 and December 31, 2015, respectively.
The maturity date of the note has been extended to June 30, 2016.
The Company’s CEO and the bookkeeper
who is the wife of the CEO provide consulting services to the Company through companies controlled by the individuals. The Company
accrued $40,500 for compensation for the CEO during each of the three-month periods ended March 31, 2016 and 2015. Accrued compensation
to the CEO totaled $352,625 and $318,125 as of March 31, 2016 and December 31, 2015, respectively.
The bookkeeper earned $4,500 during each of
the three-month periods ended March 31, 2016 and 2015 for services provided to the Company. Accrued compensation to the bookkeeper
totaled $16,500 and $12,000 as of March 31, 2016 and December 31, 2015, respectively.
NOTE 10 – SUBSEQUENT EVENTS
The Company evaluated events occurring after
the date of the accompanying condensed balance sheets through the date the financial statements were issued and has identified
the following subsequent event that it believes requires disclosure.
In May 2016, the Company received proceeds
of $25,000 from the sale of 500,000 shares of its common stock at $0.05 per share.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Background
Klever Marketing, Inc. (the “Company”)
was created to develop, market and distribute an electronic shopping cart device for in-store advertising, promotion and media
content and retail shopper services and has not commenced its planned principal operations. The Company’s activities since
inception have consisted principally of developing various applications of its electronic shopping cart concept including its mobile
application for smart phones which the Company is currently testing in retail supermarkets, obtaining patents and trademarks related
to its technology, and raising capital. The Company’s activities are subject to significant risks and uncertainties including
failing to secure additional funding needed to finalize development of the Company’s technology and to commercialize its
product in a profitable manner.
Going Concern Uncertainty
As shown in the accompanying condensed financial
statements, during the three months ended March 31, 2016 and 2015, the Company did not generate any revenue from product sales
and reported net losses of $80,492 and $88,756, respectively. As of March 31, 2016, the Company’s current and total liabilities
exceeded its current assets by $820,956. As of March 31, 2016, the Company had $25,563 of cash.
The Company will require additional funding
during the next twelve months to finance the growth of its current operations and achieve its strategic objectives. These factors,
as well as the uncertain conditions that the Company faces relative to capital raising activities, create substantial doubt as
to the Company’s ability to continue as a going concern. The Company is seeking to raise additional capital principally through
private placement offerings and is targeting strategic partners in an effort to finalize the development of its products and begin
generating revenues. The ability of the Company to continue as a going concern is dependent upon the success of future capital
offerings or alternative financing arrangements and expansion of its operations. The accompanying financial statements do not include
any adjustments that might be necessary should the Company be unable to continue as a going concern. Management is actively pursuing
additional sources of financing sufficient to generate enough cash flow to fund its operations through calendar year 2016. However,
management cannot make any assurances that such financing will be secured.
Results of Operations
Revenues
To date, the Company has not generated any
operating revenues.
Operating Expenses
General and administrative expenses for three
months ended March 31, 2016 decreased by $7,298 to $79,565 from $86,863 for the three months ended March 31, 2015. The primary
reason for the overall decrease in general and administrative expenses is a decrease in legal and professional fees, and outside
services in the first quarter of 2016 compared to the first quarter of 2015.
Research and development expenses are currently
not material to our operations and totaled $313 and $1,606 for the three months ended March 31, 2016 and 2015, respectively.
Other Income (Expense)
Interest expense for the three months ended
March 31, 2016 and 2015 was $319 and $0, respectively. The interest expense in the current year is comprised of interest expense
accrued on a related party note payable.
Provision for Income Taxes
The provision for income taxes was comparable
for the three months ended March 31, 2016 and 2015, amounting to $295 and $287, respectively. The biggest component of income tax
expense in both years is the interest and penalties accrued associated with the Company’s uncertain tax positions.
Net Loss
As a result, net loss for the three months
ended March 31, 2016 decreased by $8,264 to $80,492 from $88,756 for the three months ended March 31, 2015.
Liquidity and Capital Resources
The Company requires working capital to fund
its proposed product development and operating expenses for which the Company has relied primarily on short-term borrowings and
the issuance of restricted common stock. During the three months ended March 31, 2016, the Company sold 500,000 shares of its restricted
common stock for total proceeds of $25,000.
As of March 31, 2016, our cash position was
$25,563, compared to $31,782 as of December 31, 2015. The Company currently does not have sufficient cash to fund its operations
for the next 12 months, and will require working capital to complete development, testing and marketing of its new mobile products
and to pay for ongoing operating expenses. We anticipate adding consultants for technology development and the corresponding operations
of the Company, but this will not occur prior to obtaining additional capital. Management is currently in the process of looking
for additional investors. Currently, loans from banks or other lending sources for lines of credit or similar short-term borrowings
are not available to the Company. The Company has been able to raise working capital to fund operations from short-term borrowings
from principal shareholders or officers and directors, or obtained through the issuance of the Company’s restricted common
stock.
As of March 31, 2016, our current liabilities
and total liabilities of $846,519 exceeded our current assets of $25,563 by $820,956.
Cash Flows From Operating Activities
During the three months ended March 31, 2016,
net cash used by operating activities was $17,595, resulting from our net loss of $80,492, partially offset by non-cash expenses
of $6,742 and increases in accounts payable of $17,494 and accrued liabilities of $38,661.
By comparison, during the three months ended
March 31, 2015, net cash used by operating activities was $9,793, resulting from our net loss of $88,756, partially offset by non-cash
expenses of $4,920 and increases in accounts payable of $30,256 and accrued liabilities of $43,787.
Cash Flows From Investing Activities
During the three months ended March 31, 2016,
net cash used by investing activities was $13,624, comprised of intellectual property development costs. During the three months
ended March 31, 2015, net cash used by investing activities was $45,361, comprised of capitalized software development costs of
$37,567 and intellectual property development costs of $7,794.
Cash Flows From Financing Activities
During the three months ended March 31, 2016,
net cash provided by financing activities was $25,000, comprised of proceeds from issuance of common stock. During the three months
ended March 31, 2015, net cash provided by financing activities was $52,500, comprised of proceeds from issuance of common stock.
Factors That May Affect Future Results
Management’s Discussion and Analysis
contains information based on management’s beliefs and forward-looking statements that involve a number of risks, uncertainties,
and assumptions. There can be no assurance that actual results will not differ materially from the forward-looking statements as
a result of various factors, including but not limited to the following:
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The Company may not obtain the equity funding or short-term borrowings
necessary to market and launch its mobile applications.
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|
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·
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The Company may not be able to raise sufficient capital to maintain its ongoing operations.
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·
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The product development and launch may take longer to implement than
planned or may not be successful.
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Recent Accounting Pronouncements
There were no new accounting pronouncements
issued during the three months ended March 31, 2016 and through the date of this filing that we believe are applicable to or would
have a material impact on the condensed financial statements of the Company.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures
that are designed to help ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed,
summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated and
communicated to our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based
on that evaluation and the requirements of the Exchange Act, our Chief Executive Officer and Chief Financial Officer concluded
that, as of March 31, 2016, our disclosure controls and procedures continue to be ineffective. The small size of our Company
does not provide for the desired segregation of duty control functions, and we do not have the required level of documentation
of our monitoring and control procedures. Currently, our financial constraints prevent us from fully implementing the internal
controls prescribed by the Sarbanes-Oxley Act.
Internal Control Over Financial Reporting
The Company’s management is responsible
for establishing and maintaining adequate internal controls over financial reporting for the Company. Due to limited resources,
Management conducted an evaluation of internal controls based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The results of this evaluation
determined that our internal control over financial reporting was ineffective as of March 31, 2016, due to material weaknesses. A
material weakness in internal control over financial reporting is defined as a deficiency, or a 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. A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.
Management’s assessment identified the following material
weaknesses in internal control over financial reporting:
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·
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The small size and lack of financial resources of our Company limits our ability to achieve the desired level of separation of internal controls and financial reporting. We do have a separate CEO and CFO, to review and oversee the financial policies and procedures of the Company, which does achieve a degree of separation. However, until such time as the Company is able to hire a Controller and appoint an audit committee, we do not believe we meet the full requirement for separation.
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·
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We do not have a functional audit committee.
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|
|
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·
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We have not achieved the desired level of documentation of our internal controls and procedures. When the Company obtains sufficient funding, this documentation will be strengthened through utilizing a third party consulting firm to assist management with its internal control documentation and further help to limit the possibility of any lapse in controls occurring.
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·
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We have not achieved the desired level of corporate governance to ensure that our accounting for all of our contractual and other agreements is in accordance with all of the relevant terms and conditions. Because of our limited capital resources, we sometimes formalize our agreements with certain contractors after the work is performed when additional resources become available to pay for the services.
|
As a result of the material weaknesses in internal
control over financial reporting described above, the Company’s management has concluded that, as of March 31, 2016, the
Company's internal control over financial reporting was not effective based on the criteria in Internal Control - Integrated Framework
issued by the COSO.
To date, the Company has not been able to add
any additional members to its Audit Committee due its limited financial resources. When the Company obtains sufficient funding,
Management intends to add additional members to the Audit Committee and charge them with assisting the Company in addressing
the material weaknesses noted above. The Company’s lack of current financial resources makes it impossible for the Company
to hire the appropriate personnel needed to overcome these weaknesses and ensure that appropriate controls and separation of responsibilities
of a larger organization exist. We also will continue to follow the standards for the Public Company Accounting Oversight Board
(United States) for internal control over financial reporting to include procedures that:
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Pertain to the maintenance of records in reasonable detail accurately that fairly reflect the transactions and dispositions of the Company's assets;
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Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and
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Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
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Our management determined that there were no
changes made in our internal controls over financial reporting during the three months ended March 31, 2016 that have materially
affected, or are reasonably likely to materially affect our internal control over financial reporting.
Changes in internal controls.
There
were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company has taken limited steps to meet
its
Sarbanes-Oxley (SOX)
Section 404 compliance requirements and implement procedures to assure financial reports are prepared
in accordance with generally accepted accounting principles (GAAP) and therefore fairly represent the results and condition of
the Company. We are not materially compliant with the Section 404 requirements due to economic constraints.