Notes to the Financial Statements
September 30, 201
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(Unaudited)
NOTE 1.
ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Organization
INTREorg Systems, Inc. (the “Company”) was incorporated under the laws of the State of Texas on November 3, 2003. The Company was organized for the purpose of providing internet consulting and "back office" services to companies. The Company's fiscal year end is December 31st.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Going Concern
The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's current liabilities exceed the current assets by $3,127,504 at September 30, 2017. At September 30, 2017, the Company had an accumulated deficit of $6,435,483.
The Company's ability to continue as a going concern is dependent upon its ability to generate additional revenues or raise the necessary capital to further implement its business plan and ultimately achieve profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations. Accordingly, there is substantial doubt as to our ability to continue as a going concern. However, management believes that actions presently being taken provide the opportunity for the Company to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Basis of Presentation
Interim Accounting
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's annual report on Form 10-K for the year ended December 31, 2016 as filed with the SEC on September 25, 2018. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year ended December 31, 2016 as reported in Form 10-K have been omitted.
Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue when it is earned and when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred or service has been provided and the Company has no remaining obligations; the fee is fixed or determinable; and collectability is probable.
Marketable equity securities
As of September 30, 2017, the Company earned 143,141 restricted common shares of Radiant Oil and Gas (“Radiant”) for services rendered (see note 2). The Company determines the appropriate balance sheet classification of its marketable securities at the time the shares are acquired and reevaluates such determination at each balance sheet date. The marketable equity securities are classified as current, available-for sale and carried at fair value, with the change in unrealized gains and losses reported as a separate component of other comprehensive income (loss) on the Statements of Comprehensive Loss and accumulated as a separate component of stockholders' equity on the balance sheets. The Company sold the securities in October 2017 for $9,000 in a private direct sale transaction.
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INTREORG SYSTEMS, INC.
Notes to the Financial Statements
September 30, 2017
(Unaudited)
NOTE 1.
ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED)
Fair Value of Financial Instruments
The accounting guidance establishes a fair value hierarchy based on whether the market participant assumptions used in determining fair value are obtained from independent sources (observable inputs) or reflect the Company's own assumptions of market participant valuation (unobservable inputs). A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The accounting guidance establishes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2—Quoted prices for identical assets and liabilities in markets that are inactive; quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; or
Level 3—Prices or valuations that require inputs that are both unobservable and significant to the fair value measurement.
The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.
NOTE 2.
RELATED PARTY TRANSACTIONS
Licensing Agreement
On October 30, 2012, the Company entered in to an Intellectual Property License and Consulting Agreement with Public Issuer Stock Analytics, LLC (PISA) a Texas Limited Liability Corporation, whose managing member is a shareholder, granting the Company an exclusive license to develop and use the Licensed Technology and to fully exploit the Licensed Technology by selling products and/or services. Upon signing of the agreement, the company paid PISA 250,000 shares of restricted common stock and thereafter and until the second anniversary 20,000 shares monthly of restricted common stock monthly and 1% of the gross sales of products and/or services. Thereafter and until the third anniversary, 20,000 shares monthly of restricted common stock and 2% of Gross Sales of products and/or services. Following the third anniversary, 20,000 shares monthly of restricted common stock and 3% of Gross Sales. The Company expensed $44,494 and $106,158 for the nine-month periods ending September 30, 2017 and 2016, respectively, related to this agreement.
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INTREORG SYSTEMS, INC.
Notes to the Financial Statements
September 30, 2017
(Unaudited)
NOTE 2.
RELATED PARTY TRANSACTIONS (CONTINUED)
Line of Credit
On June 19, 2011, the Company entered into a revolving line of credit with J.H. Brech, LLC (“Brech”); a related party, to provide access to fund our operations (the "Line of Credit"). Under the terms of the 8% Line of Credit, we have access of up to $500,000. Advances under this Line of Credit were in abeyance for approximately 12 months from August of 2011 to August of 2012; however, the Line of Credit is open again and we may take advances out pursuant to the terms summarized
herein. On August 26, 2014, the line of credit was amended to decrease the conversion price to $0.25 per share.
Interest accrues at 8% per annum on the outstanding principal amount due under the revolving line of credit and is payable semi-annually on June 30 and December 31 of each year commencing June 30, 2011. The principal and any accrued but unpaid is due on the earlier of:
June 19, 2014 (the revolver has not been formally extended, however, the Company continues to borrow under the revolver), or
the date on which we receive at least $1.5 million in gross proceeds through one or a series of transactions.
At the Company’s sole discretion, we can pay the interest in shares of our common stock valued as follows:
if our common stock is not listed for trading on an exchange or quoted for trading on the OTC Bulletin Board or the OTC Markets Group (formerly the Pink Sheets), interest shares are valued at the greater of $1.00 per share or the fair market value as determined in good faith by us based upon the most recent arms-length transaction, or
if our common stock is listed for trading on an exchange or quoted for trading on the OTC Bulletin Board or the OTC Markets Group, interest shares will be valued at the greater of (A) the closing price of our common stock on the trading day immediately preceding the date the interest payment is due and payable, or (B) the average closing price of the common stock for the five trading days immediately preceding the date the interest payment is due and payable.
The Company may prepay the note at any time without penalty. Upon an event of default, Brech has the right to accelerate the note. Events of default include:
our failure to pay the interest and principal when due,
a default by us under the terms of the note,
appointment of a receiver, filing of a bankruptcy provision, a judgment or levy against our company exceeding $50,000 or a default under any other indebtedness exceeding $50,000,
a liquidation of our company or a sale of all or substantially all of our assets, or
a change of control of our company as defined in the note.
On August 25, 2014, we entered into an amendment of the Line of Credit agreement to provide that the conversion price shall be revised from $1.00 per share to $0.25 per share. The maturity date of the agreement remained the same. The parties also acknowledged and agreed that no payment of principal of the Line of Credit has been made and received, and accordingly, the amended conversion price applies to both the interest and principal of the Line of Credit. Accrued and unpaid interest on the Line of Credit at September 30, 2017 and December 31, 2016 totaled $82,931and $62,681, respectively.
As of September 30, 2017, and December 31, 2016, the Company owed Brech $322,809 and $314,195, respectively for amounts advanced to the Company for working capital expenses. The balance is past due and is classified as a current liability as of September 30, 2017 and December 31, 2016. As of the date of this Report, Brech, has not declared a default on the Line of Credit and waived the loan defaults on March 2, 2017 through September 30, 2017.
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INTREORG SYSTEMS, INC.
Notes to the Financial Statements
September 30, 2017
(Unaudited)
NOTE 2.
RELATED PARTY TRANSACTIONS (CONTINUED)
Cicerone Consulting Agreement
As of September 30, 2017, and December 31, 2016, Cicerone Corporate Development, LLC ("Cicerone") is owed $29,946 for company reimbursable expenses, under the terms of the Company's 2011 consulting agreement with Cicerone, which was terminated in 2011.
Payable to the Chief Executive Officer and President
Mr. Dunckel is owed $202,332 in unpaid consulting fees. During the nine months ended September 30, 2017 and 2016, the Company expensed no consulting fees to Mr. Dunckel.
Payable to former President and Chairman of the Board
As of September 30, 2017, and December 31, 2016, the Company has a payable of $86,000 to a former President and Chairman of the Board for consulting services rendered in prior years.
Payable to shareholder
As of September 30, 2017, and December 31, 2016, the Company has accrued $76,876 and $76,876, respectively, for accounting services from a shareholder, PT Platinum. This amount is included in accounts payable-related parties. During the nine months ended September 30, 2017 and 2016, the Company expensed no fees to PT Platinum.
NOTE 3.
NOTES PAYABLE
The Company’s notes payable totaling $521,000 bear interest at 6% to 10% per annum. Accrued and unpaid interest at September 30, 2017 and December 31, 2016 amounted to approximately $454,786 and $423,120, respectively, and is included with accrued interest and other liabilities in the accompanying financial statements. All of the Company’s notes payable are past due and in default.
NOTE 4.
COMMITMENTS AND CONTINGENCIES
.
At September 30, 2017 and December 31, 2016, management estimates there is a potential liability of $453,290 related to the operations under the former management of the Company. The amount is recorded as an accrued compensation in the accompanying financial statements and relates primarily to compensation in years prior to 2009. Management is not aware of any pending or threatened litigation involving the Company as of September 30, 2017 or since, through the date of these financial statements.
NOTE 5.
CAPITAL STOCK.
During the nine-month period ended September 30, 2017, the Company authorized the issuance of 20,000 shares per month to Public Issuer Stock Analytics (PISA) pursuant to the terms of the intellectual property license and consulting agreement the Company maintains with them. The grants are valued at the closing price of the Company’s common stock as of the grant date. During the three and nine-month period ended September 30, 2017 and 2016, the Company recorded an expense of $44,894 and $108,299, respectively for the share grants.
During the nine- month period ended September 30, 2017 the Company cancelled the issuance of 355,547 shares to an investor relations firm pursuant to the terms of the consulting agreement the Company maintains with them.
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INTREORG SYSTEMS, INC.
Notes to the Financial Statements
September 30, 2017
(Unaudited)
NOTE 5.
CAPITAL STOCK. (CONTINUED)
2010 Stock Option and Award Incentive Plan
On June 29, 2010, the Company’s shareholders approved the adoption of the Company’s 2010 Stock Option and Award Incentive Plan (the “Plan”). The Plan, which provides for the grant of stock options to the Company’s directors, officers, employees, consultants, and advisors of the Company, is administered by a committee consisting of members of the Board of Directors (the "Stock Option Committee"), or in its absence, the Board of Directors. The Plan provides for a total of 2,000,000 shares of common stock to be reserved for issuance subject to options.
Stock option expense of $16,113and $60,116 was recorded during the three and nine-month period ended September 30, 2017.
During the nine months ended September 30, 2017, no stock options were granted.
NOTE 6.
SUBSEQUENT EVENTS
Board of Directors:
Mr. Lindholm was issued 170,000 shares of common stock on December 13, 2017 which converted $34,000 in accrued director fees and was also issued an additional 50,000 shares of common stock related to this Director Agreement. On January 27, 2017, Mr. Michael Farmer resigned as Director. Mr. Redgie Green resigned on October 11, 2017 and a copy of his resignation letter is an exhibit hereto. On October 16, 2017 Mr. John Devlin Jr. was named Director and died on March 8, 2018. Mr. Devlin was issued 50,000 shares of common stock upon appointment to the Board. On March 13, 2018, Mr. Robert Flynn was appointed to the Board as Director, Secretary and Treasurer. Mr. Flynn was issued 50,000 shares of common stock upon appointment to the Board. A copy of the Director Agreements attached hereto as an exhibit.
Management:
On March 13, 2018, Mr. Robert Flynn was named Vice President / General Counsel. Messrs. Lindholm and Flynn entered into management consulting agreements for one year. 377,247 shares were issued to Messrs. Lindholm and Flynn on April 3, 2018 related to these management consulting agreements.
Public Stock Issuer Analytics, Inc. (“PISA”):
On March 1, 2017, PISA License Agreement was extended to September 30, 2017. On November 11, 2017, the PISA Intellectual Property License Agreement was extended ten years from September 30, 2017 through September 30, 2027. Through September 15, 2018, the Company issued 586,545 shares to Public Issuer Stock Analytics pursuant to the terms of the intellectual property license.
J.H. Brech Revolving 8% Credit Note:
The balance on the line of credit as of September 18, 2018 was $215,796.
Other:
On October 15, 2017, management sold its Radiant Oil and Gas, Inc. common shares in a private sale for $9,000.
On June 27, 2018, the Company named Mr. Richard M. Nummi, Director and Chairman of the Executive Compensation Committee. Subject to vesting requirements, the Company granted 50,000 shares of common stock to Mr. Nummi on the date of this agreement.
On September 12, 2018, the Company issued 1,185,000 shares of common stock for $237,000.
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