Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Preliminary
Note Regarding Forward-Looking Statements
This
document contains “forward-looking statements” within the meaning of the private
securities litigation reform act of 1995. Prospective shareholders should
understand that several factors govern whether any forward-looking statement
contained herein will be or can be achieved. Any one of those factors could
cause actual results to differ materially from those projected herein. These
forward-looking statements include plans and objectives of management for future
operations, including plans and objectives relating to the products and the
future economic performance of the company. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, future business decisions, and
the
time and money required to successfully complete development projects, all
of
which are difficult or impossible to predict accurately and many of which are
beyond the control of the company. Although the company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of those assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in any of the
forward-looking statements contained herein will be realized. Based on actual
experience and business development, the company may alter its marketing,
capital expenditure plans or other budgets, which may in turn, affect the
company's results of operations. In light of the significant uncertainties
inherent in the forward-looking statements included therein, the inclusion
of
any such statement should not be regarded as a representation by the company
or
any other person that the objectives or plans of the company will be
achieved.
The
following discussion and analysis should be read in conjunction with the
financial statements and Preliminary Note Regarding Forward-Looking Statements
provided above. This section also contains reports of activities and results
of
operations that occurred in the current quarter up to the filing date of this
Form and subsequent to the quarter ending June 30, 2007. In some cases, the
conditions and results of operations are reported without accompanying
distinctions between the quarter in which these activities and events
occurred.
Overview
and History
The
Company was incorporated as HOJO Holdings, Inc. on January 5, 1999 under the
laws of the state of Delaware. The Company was renamed Senticore, Inc. in March
2003 and renamed Integrative Health Technologies, Inc. (“IHTI”, “the Company”,
“we”, “us”, or “our”) on August 1, 2006. The Company’s reporting symbol upon
completion of the merger and reorganization on June 3, 2006 was SNIO which
was
subsequently changed to IHHT and changed to the current symbol of IHTI as a
result of the reverse merger on March 27, 2007.
April
2, 2007.
Company filed a Form 8-K reporting that on February 11, 2005,
the Registrant filed Form N-54 in which it elected to become a Business
Development Corporation (“BDC”) under the Investment Company Act of 1940.The
Registrant believed that this election was valid and reported that it was a
BDC.
However, the Registrant reported in a Form 8-K filed on February 21, 2007 that
it had discovered an irregularity in the filing of the N-54, and that it had
concluded, as a result, that it was not and had never been a BDC. Since February
21, 2007, representatives of the Registrant have been in discussion with
representatives of the SEC. It is the view of the SEC that the Registrant’s
election to become a BDC was a valid election, and that the Registrant remains
a
BDC despite the statements to the contrary contained in the February 21, 2007
Form 8-K.
The
Registrant has decided that it would be in the best interests of the Company
and
its shareholders to render the issue moot by filing a notice of withdrawal
of
its BDC election under s.54(c) of the Investment Company Act. The Registrant
has
already filed a preliminary Form 14-C reporting that the decision to withdraw
the election has been approved by the Registrant’s Board of Directors and
shareholders and will forthwith file a Definitive 14-C notifying the SEC and
its
shareholders of the withdrawal of its BDC status.
April
10, 2007.
Form 14-C filed announcing intention to withdraw its election
to be regulated under sections 55 to 65 of the investment company act of 1940,
as amended. A copy is attached by reference.
April
17, 2007.
Form 10-K
Annual Report for 2006 filed
within the required filing period but, without its independent audit completed
for the year ending 2006 due to a sudden and unexpected death in the auditor’s
family and the contracting of a serious debilitating disease. Attempts to obtain
another auditor were precluded by the absence of adequate financial
records.
May
2, 2007.
Auditor recovers from illness and returns to work, but reports
that she will be unable to complete the audit by the May 17, 2007
deadline.
May
7, 2007.
Form N-15C filed reporting that the inherent generic
difficulties and costs associated with being a BDC and lack of any perceived
advantages led the Board of Directors to authorize the withdrawal of this
election. Holders of shares of common stock of the Company representing in
excess of eighty five and two-tenths percent (85.2%) of the 40,552,397 validly
issued shares of the Company, signed the Action By Written Consent in favor
of
the change. There were no votes cast against the decision to cease being a
business development company. A Definitive Information Statement on Schedule
14C
was filed by the Company with the Commission on Apr 5, 2007 in connection with
the decision, and was mailed to shareholders on that date.
May
17, 2007.
Absent completion of the independent audit of the 2006 Annual
Filing, NASDAQ removed the Company from the OTC.BB reclassifying it as a Pink
Sheet stock. NASDAQ advises that it will consider re-admission as an OTC.BB
stock upon submission of Form 15-211C by a sponsoring market maker.
May
21, 2007.
The Company filed its 10-Q for the quarter ending March 31,
2007 in the required time frame. On May 31, 2007, the Company received the
required audit and, since it differed little from the Company’s 2006 annual
filing, it was included in an amendment to the 2006 filing which was filed
on
June 4, 2007. Thus, in the Company’s view, we have met the required filings for
an OTCBB company and are presently taking the required actions to request that
we regain our status to be eligible for quotation on the OTCBB.
June
4, 2007.
Company files Form 10-K/A amendment to previously filed 10-K
with independent auditor’s report with no material differences and with 1% of
the financial information provided in the previous 2006 10-K.
June
5, 2007.
Company files 8-K explaining that on April 16, 2007 the
Company filed its 10-K for the fiscal year ending December 31, 2006 within
the
required time period for the annual filing. However, the required annual
independent audit of the financial statements was not included since the auditor
became seriously ill and, in addition, had an unexpected death of a parent,
thus
preventing the completion of the audit. We had insufficient time and records
to
employ a replacement auditor before the April 16 filing. In order for a filing
to be complete, it must contain all required certifications and have been
reviewed or audited as applicable, by an account registered with the Public
Company Accounting Oversight Board (PCAOB). Absent the required audit, NASDAQ
placed an “e” on the company’s trading symbol, providing a 30-day grace period
through May 17, 2007 to complete the filing. Although the PCAOB auditor returned
to work in early May, it was insufficient time to complete the audit by May
17th, causing the Company to be removed from the OTCBB and classified as a
“Pink
Sheet” company on May 21, 2007.
August
1, 2007.
Company begins study of the positive effects of the AlgaeCal
Bone-Health “cookie” on adolescents participating in normal activities suggests
it may also enhance the bone health of those adolescents participating in highly
demanding physical activities. This study is designed to (1) examine
that possibility and (2) to explore the feasibility of marketing the bone-health
cookie to these adolescents or their parents.
August
23, 2007
. Company announces its program to help raise funds for a
charity the company is currently supporting--The Alamo City Mercy Foundation’s
orphanage in Kitengela, Africa. JESUS. Hobbs House of Hope, offers hope for
the
“chokoras”, children of the dirt, who wander aimlessly through the streets of
Africa having lost their parents to AIDS and other diseases.
October
15, 2007.
The Financial Industry Regulatory Authority (“FINRA) cleared
Park Financial Group, Inc.’s request for an un-priced quotation on the OTC
Bulletin Board for Integrative Health Technologies, Inc.’s common stock (IHTI)
and approved Park’s request for a price quotation at “market pricing” on October
26, 2007.
Changes
in Investment Strategy and Operating Policies and Actions Taken by Current
Management
Overview.
As reported in its previous filings, when it assumed control on June 3, 2006,
our current management team implemented a number of significant changes to
the
Company’s previous investing strategy and operating policies. These included but
were not limited to cutting costs, focusing the Company on the healthcare and
nutritional industries, divesting of unrelated assets, effecting a 200:1 reverse
split of the Company’s common stock with a commensurate change in the conversion
rights of the Series A Convertible Preferred Stock, obtaining the agreement
of
IHT-IL’s Scientific Advisory Board to serve as IHTI’s Scientific Advisory Board,
recapturing shares issued for unconsummated acquisitions or which merited
recapture for various other reasons, and de-electing BDC
status. Except as set out below, these changes are largely complete
as of the date of this filing.
IHT-IL’s
Scientific Advisory Board agreed to serve as IHTI’s Scientific Advisory
Board.
After the acquisition of IHT-IL, its Scientific Advisory Board,
as listed in Exhibit 99.2, agreed to serve as IHTI’s Scientific Advisory Board.
The acquisition of IHT-IL’s assets and Scientific Advisory Board brought a new
revenue stream to the Company from managerial fees from its three portfolio
companies as discussed below. The Scientific Advisory Board is being compensated
by our major shareholders at no expense to the Company.
The
number of outstanding shares had been reduced by recapturing shares issued
for
unconsummated acquisitions.
The current management team has pursued a
plan to recapture shares that were previously issued in connection with
acquisitions that were not consummated. The Company reported in
previous filings that it had successfully recaptured over 22% of the shares
previously reported as outstanding and there are still a number of shares with
questionable substantiation for their issuance. Historically, at closing, the
Company had 181,145,125 (
905,726
post-reverse) issued and outstanding
shares of common stock and 20,000,000 preferred shares convertible into common
stock at a 1:400 ratio yielding 8,000,000,000 (
40,000,000
) additional
shares of common stock for a fully-diluted total of 8,181,145,125
(
40,905,726
). Of this total, 107,593,480 (537,967) were freely trading
in the “float” and 7,355,800 (
367,759
) were on the restricted
list.
Using
only post-reverse share totals, IHTI now has
40,623,366
issued and
outstanding shares,
534,914
of which are in the “float” and
88,552
remain on the restricted list. The number of restricted
shares
have been reduced by 76% from
367,759
to
88,552
as a function
of recapturing invalidly issued shares. Another
70,256
restricted
shares have been placed on a stop-transfer administrative hold pending legal
action to have they recaptured and voided.
Plan
to liquidate all investments unrelated to the healthcare and nutrition
industries.
Although, as reported in previous filings, the Company has
divested itself of various assets unrelated to the healthcare and nutrition
industries, it continues to hold some shares in TJSS and in other public
companies resulting from investments made by previous management prior to June
3, 2006. Included are shares in Adzone Research, Beere Financial and The Justice
Fund. Over time, management expects to liquidate its position in most or all
of
these investments and apply any funds received to debt reduction and to
investment in core activities in the healthcare and nutritional
industries.
Operating
expenses for the quarter have been met through managerial fees received from
its
portfolio companies.
The Company did not issue any new shares during
the consecutive four quarters ended March 31, 2007, funding its activities
instead from management fees paid to the Company by its portfolio companies.
The
Company’s requirement that all of its portfolio companies provide a percentage
of their gross receipts from sales and services provided sufficient capital
to
meet our operating needs this quarter.
Activities
of Portfolio Companies
Health
and Medical Research, Inc. (“HMRI”), A Clinical Research
Organization
Grant
received for database analyses
Mannatech
Inc. (NASDAQ:MTEX) announced the award of its grant to IHTI for analysis of
IHTI’s data base in a March 28, 2006 press release incorporated into this filing
as EXHIBIT 99.3.
Testing
at Mannatech International’s Annual Sales Meeting
HMRI
provided its four mobile testing units to HealthTech Development, LLC. (HTD)
to
market on-site testing to Mannatech’s sales associates as part of their training
program. During the conference, HTD marketed 527 bone-density/body composition
tests and 133 blood chemistry test panels. HMRI administered 560
Quality of
Life Questionnaires
, product usage, and
Depression
scales which,
along with the DEXA and blood tests, were added to HMRI’s database.
The
AlgaeCal Bone-Health study
This
study is discussed in previous filings and, at the time of this filing, 92%
of
all subjects have completed the study and these data are now being analyzed
for
safety and efficacy. Preliminary results suggest that the Bone-Health program
is
successful in improving bone health, particularly in adolescents and
post-menopausal women. If these initial findings are supported in the final
report, IHTI’s product marketing portfolio company, HealthTech Products, LLC,
will add the Bone-Health Program to its inventory of products.
The
AlgaeCal Pro study
HMRI
began the
AlgaeCal Pro
study to evaluate the safety and efficacy of a
bone-health program designed to be marketed exclusively by healthcare providers.
It includes the basic components of the
AlgaeCal Bone Health
program
except that it increases the Vitamin D-3 levels to 2,000 IU and adds Vitamin
C,
Boron and higher levels of magnesium to the formulation. To increase
compliance, it is packaged in individual and numbered daily
servings.
Additional
clinical trials and study activities
HMRI
continues its involvement with the preparation of study protocols, the review
of
the scientific literature, and the conducting of pilot studies for a number
of
clients that may or may not eventuate in grants. These studies involve the
effects of nutritional supplements on the growth and development of impoverished
children that will be housed in the Hobbs House of Hope in Kitengela, Kenya,
Africa; a supplement to treat toe fungus; a variety of wild garlic supplement
to
maintain healthy cholesterol levels; and the effects of a sugar substitute,
trehalose, on diabetic and pre-diabetic subjects. HMRI is currently preparing
a
manuscript for publication in a peer-reviewed medical journal reporting the
results of a study previously completed on the effects of a glucomannan soluble
fiber on weight loss and compliance.
HealthTech
Development (“HTD”) A Consulting, Research & Development (R&D)
Company
Testing
at Mannatech International’s Annual Sales Meeting.
HTD
positioned four of the Company’s mobile testing units at Mannatech’s annual
sales and training conference in Dallas, Texas from March 28 through April
1,
2007. This activity resulted in the sale of 527 Bone Density/Body Composition
tests and 133 43-panel blood chemistry tests. These tests were added to HMRI’s
database after generating $52,825 of income for HTD. However, since these
amounts were largely received with checks and credit cards which were processed
subsequent to the conference, this income will be recorded in the quarter ending
June 30, 2007.
Acquisition
of 8% Ownership of AlgaeCal International.
During this quarter, the
Company is finalizing its oral Agreement with AlgaeCal International
(
www.algaecal.com
) for acquisition of an 8% interest in AlgaeCal
International in return for research and development services provided by HTD.
The ownership includes a 1% override on all AlgaeCal sales. The
monthly average sales have increased 55% over the monthly average at the
beginning of the quarter. The Agreement also includes granting IHTI the
exclusive rights to market AlgaeCal Pro, a calcium-strontium vitamin-mineral
enhanced supplement to be marketed exclusively to healthcare providers. AlgaeCal
Pro will be marketed by HealthTech Products, LLC beginning June
2007.
Research
for pilot studies developed or under development.
HTD continues to
develop research protocols for several studies examining the safety and efficacy
of different supplements thought to: (1) reduce stress, (2) provide appetite
control, (3) reduce incontinence, (4) improve glucose control, (5) aid in weight
control and (6) reduce “at risk” cholesterol levels. Should any of these
protocols result in the funding of clinical trials, such trials will be
conducted by Health and Medical Research, Inc. However, while all of these
protocols are being developed during the reporting period, past experience
has
taught us that less than half will eventually result in funded clinical
trials.
Results
of Operations
Additional
information.
The financial results of our operation during this quarter
are summarized in the graphs and the supporting comments under FINANCIAL
HIGHLIGHTS above. The section on
Changes in Investment Strategy and
Operating Policies and Actions Taken by Current Management
provides a
summary of our day to day operations. Additionally, our website
(
www.ihtglobal.com
) provides a copy of this 10-QSB and additional
information that relates to the
Results of Operations
. However, since
we have withdrawn our BDC status, in order to clarify the impact it has had
on
our past operations and the impact it could have on future operations will
require a review of how profits and losses are determined for BDCs.
How
portfolio companies impact a BDCs profit or loss
. To understand the
potential impact of our withdrawal of our BDC status during this quarter will
require an understanding of how BDCs, as compared to with non-BDCs, compute
and
report profits and losses. For the purposes of this discussion, a
“portfolio company” will refer to a company in which a BDC has invested, whether
wholly-owned or partially-owned, publicly traded or not.
BDCs
must
continually track the value of their investments in portfolio companies. Any
increase in value during a period is reported as a profit for that period,
while
a decrease in value during a period is reported as a loss for that period.
If
the portfolio companies are public, the valuation is derived from the ending
bid
or trading price of the stock on the date of the filing. If the portfolio
companies are not public, the BDC must establish an appropriate valuation
methodology. In either case, the principle is the same: all the portfolio
companies are valued at the beginning of the period and at the end of the
period, and the change in these values during the period is reported as a profit
or loss.
How
portfolio companies impact a non-BDCs profit or loss.
A non-BDC
computes its profit and loss from subsidiaries according to the consolidation
rules under generally accepted accounting principles (“GAAP”). These rules are
too complex to fully discuss here, but the general idea is that the
subsidiaries’ individual profits and losses are consolidated into the non-BDC
parent’s income statement. For example, a non-BDC parent with two wholly-owned
subsidiaries that each made a profit of $1,000 during the period would typically
have a profit of $2,000 for the period, subject to any “consolidation
adjustments”.
Change
in BDC status causes change in focus for profit and loss performance.
The point of the discussion in the previous paragraphs is that while the Company
was a BDC, its profits or losses were determined primarily from the increase or
decrease in the value of the portfolio companies. Now that the BDC status has
been de-elected, the Company’s profits and losses will no longer be impacted by
changes in the value of its subsidiaries, but rather by the profit and loss
performance of the subsidiaries.
Restatement
of financial statements.
Since the financial statements going forward
will be prepared on a different basis than the historical statements, the
Company intends to restate some of its financial statements to facilitate
comparisons between future and past performance. Management believes that the
restated financial statements, when available, will show the Company earned
a
profit under the direction of the current management beginning with the third
quarter of 2006 through and including this filing.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S., or GAAP, requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In recording
transactions and balances resulting from business operations, the Company uses
estimates based on the best information available. The Company uses estimates
for such items as depreciable lives and the amortization period for deferred
income. The Company revises the recorded estimates when better information
is
available, facts change or actual amounts can be determined. These revisions
can
affect operating results.
The
critical accounting policies and use of estimates are discussed in and should
be
read in conjunction with the annual consolidated financial statements and notes
included in the latest 10-KSB, as filed with the SEC, which includes audited
consolidated financial statements for the fiscal year ended December 31,
2005.
Item
3.
Quantitative and Qualitative Disclosures about Market
Risk
(1)
Uncertainties of reorganization and restructuring.
We are continuing to
implement a new strategy and new policies as part of the reorganization and
restructuring which began on June 3, 2006. Such activities always carry risk
as
they can place a heavy burden on management time, they require expenditures,
and
there is never assurance that new strategies or policies will succeed as
planned.
(2)
Uncertainties of the effects of the Company’s prior BDC status.
As
disclosed in previous filings, from the time the Company filed its election
to
become a BDC through the time it withdrew the election, the Company did not
fully comply with all regulatory requirements relevant to a BDC. The company
has
attempted to cure past violations as best it can, and it has now withdrawn
its
BDC election. However,
withdrawing of the election to be
treated as a BDC does not cure any past violations that may have occurred.
If
there were any violations of the securities laws, remedies for shareholders
can
include a rescission of a shareholder's investment, fines and penalties, and
removal of officers and directors from office.
(3)
Uncertainties of the effects of unresolved issues inherited from the previous
management.
Since taking over management of the Company on June 3,
2006, current management has uncovered a
number of issues
that were unresolved by the previous management, some of which are contrary
to
representations made in the Closing and Merger and Reorganization Agreement.
Although we have resolved some of these issues, many remain unresolved.
Investors bear the risk that all unresolved issues inherited from previous
management have yet to be identified. There is also a risk that some or all
of
these issues may be incapable of resolution. There is also a risk that some
or
all of these issues may be more serious than they appear at this time, or they
may be more costly to resolve than expected, or both.
General
Nature of Unresolved Issues
. The general nature of these unresolved
issues are gaps in record-keeping and apparent instances of regulatory
non-compliance. Among other things, they affect the Company’s tax compliance,
its SEC record-keeping requirements, and its shareholder list. A non-exhaustive
selection of examples is set forth below:
1)
|
Despite
a representation by previous management to the contrary, no income
tax
returns have been filed since Senticore acquired HOJO Holdings in
March
2003.
|
2)
|
The
state of the Company’s records has not allowed current management to
ensure that all of the required IRS Forms 1099 for stock based
compensation and contract labor have been
filed.
|
3)
|
As
of the date of this filing and despite repeated requests made to
the
Company’s previous management and accountants, we have yet to receive
General Ledger information for the period from March 2003 to March
2004
sufficient to allow current management to demonstrate that the Company
is
in compliance with SEC record-keeping
requirements.
|
4)
|
The
state of the Company’s records does not allow current management to
confirm that a share log has been maintained that conforms to SEC
record-keeping requirements and that allows current management to
answer
questions that have arisen with respect to the proper number of shares
outstanding. These questions include whether shares were issued for
inadequate consideration, whether shares were issued in violation
of
regulations applicable to BDCs, and whether shares that were to be
held in
escrow were in fact so held, and if so, whether the terms of the
escrows
were complied with. The questions concerning inadequate consideration
arise mainly in connection with a lack of record-keeping that would
allow
a reconciliation of the Company’s financial records to its records of
issued shares, and in connection with a lack of record-keeping that
would
accurately track loan proceeds said to have been received but not
repaid
relating to loans for which shares were issued as collateral. The
questions concerning BDC regulations arise because BDCs are prohibited
from issuing shares to pay for services rendered, and the Company
may have
issued such shares while it was a BDC. The escrow questions arise
because
shares were issued to various parties to be held in escrow pending
the
completion of acquisitions that were never consummated (the Westar
and
Smith-Forestal transactions), and these shares were not returned
to the
Company, and it appears that these shares should have been returned
to the
Company once it became clear that the transactions would not
close.
|
5)
|
The
minutes of the meetings of the Company’s Board of Directors for periods
prior to June 3, 2006 appear to be
incomplete.
|
6)
|
The
state of the Company’s records does not allow current management to fully
understand the history of the Company’s relationship to Taj Systems, Inc.
(“TJSS”) and the history of prior management’s relationship to TJSS. The
President and CEO of TJSS are the former President and CEO of the
Company
and assumed these positions while serving in the same capacity with
the
Company. From public filings made before current management became
involved with the Company on June 3, 2006, it appears that the Company
at
one time acquired approximately 44 million shares of TJSS representing
40%
of TJSS issued stock. For reasons unclear to current management,
it
appears that the Company subsequently exchanged its 40% ownership
interest
in TJSS for a certificate representing 1.4 million convertible preferred
shares of TJSS, each convertible to 5 shares of common stock representing
a total of 7 million shares of common stock on an “as converted” basis.
Since the certificate is for restricted shares, it cannot be converted
into free-trading shares until August 31, 2007. Although, these shares
could have been converted into free-trading common stock under Rule
144
exemption on August 31, 2006, TJSS management has been unresponsive
to our
repeated demands to approve the Rule 144
exemption.
|
Item
4.
Controls and Procedures
Quarterly
Evaluation of Controls
As
of the
end of the period covered by this quarterly report on Form 10-QSB, we evaluated
the effectiveness of the design and operation of (i) our disclosure controls
and
procedures ("Disclosure Controls"), and (ii) our internal control over financial
reporting ("Internal Controls"). This evaluation ("Evaluation") was performed
by
our Chairman and Chief Executive Officer, Gilbert R. Kaats, ("CEO/CFO"). In
this
section, we present the conclusions of our CEO/CFO based on and as of the date
of the Evaluation, (i) with respect to the effectiveness of our Disclosure
Controls, and (ii) with respect to any change in our Internal Controls that
occurred during the most recent fiscal quarter that has materially affected,
or
is reasonably likely to materially affect our Internal Controls.
CEO/CFO
Certifications
Attached
to this annual report, as Exhibits 31.1 and 31.2, are certain certifications
of
the CEO/CFO, which are required in accordance with the Exchange Act and the
Commission's rules implementing such section (the "Rule 13a-14(a)/15d–14(a)
Certifications"). This section of the annual report contains the information
concerning the Evaluation referred to in the Rule 13a-14(a)/15d–14(a)
Certifications. This information should be read in conjunction with the Rule
13a-14(a)/15d–14(a) Certifications for a more complete understanding of the
topic presented.
Disclosure
Controls and Internal Controls
Disclosure
Controls are procedures designed with the objective of ensuring that information
required to be disclosed in our reports filed with the Commission under the
Exchange Act, such as this annual report, is recorded, processed, summarized
and
reported within the time period specified in the Commission's rules and forms.
Disclosure Controls are also designed with the objective of ensuring that others
make material information relating to the Company known to the CEO/CFO,
particularly during the period in which the applicable report is being prepared.
Internal Controls, on the other hand, are procedures which are designed with
the
objective of providing reasonable assurance that (i) our transactions are
properly authorized, (ii) the Company's assets are safeguarded against
unauthorized or improper use, and (iii) our transactions are properly recorded
and reported, all to permit the preparation of complete and accurate financial
statements in conformity with accounting principals generally accepted in the
United States.
Limitations
on the Effectiveness of Controls
Our
management does not expect that our Disclosure Controls or our Internal Controls
will prevent all error and all fraud. A control system, no matter how well
developed and operated, can provide only reasonable, but not absolute assurance
that the objectives of the control system are met. Further, the design of the
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that all control issues and instances of fraud,
if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of
two
or more people, or by management override of the control. The design of a system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed
in
achieving its stated objectives under all potential future conditions. Over
time, control may become inadequate because of changes in conditions, or because
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Scope
of the Evaluation
The
CEO/CFO's evaluation of our Disclosure Controls and Internal Controls included
a
review of the controls' (i) objectives, (ii) design, (iii) implementation,
and
(iv) the effect of the controls on the information generated for use in this
annual report. In the course of the Evaluation, the CEO/CFO sought to identify
data errors, control problems, acts of fraud, and they sought to confirm that
appropriate corrective action, including process improvements, was being
undertaken. This type of evaluation is done on a quarterly basis so that the
conclusions concerning the effectiveness of our controls can be reported in
our
quarterly reports on Form 10-QSB and annual reports on Form 10-K. The overall
goals of these various evaluation activities are to monitor our Disclosure
Controls and our Internal Controls, and to make modifications if and as
necessary. Our external auditors also review Internal Controls in connection
with their audit and review activities. Our intent in this regard is that the
Disclosure Controls and the Internal Controls will be maintained as dynamic
systems that change (including improvements and corrections) as conditions
warrant.
Among
other matters, we sought in our Evaluation to determine whether there were
any
significant deficiencies or material weaknesses in our Internal Controls, which
are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, or whether we had identified any
acts of fraud, whether or not material, involving management or other employees
who have a significant role in our Internal Controls. This information was
important for both the Evaluation, generally, and because the Rule
13a-14(a)/15d–14(a) Certifications, Item 5, require that the CEO/CFO disclose
that information to our Board (audit committee), and to our independent
auditors, and to report on related matters in this section of the annual report.
In the professional auditing literature, "significant deficiencies" are referred
to as "reportable conditions". These are control issues that could have
significant adverse affect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce, to a relatively low level,
the risk that misstatement cause by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employee in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in the
Evaluation, and in each case, if a problem was identified; we considered what
revisions, improvements and/or corrections to make in accordance with our
ongoing procedures.
Conclusions
Based
upon the Evaluation, the Company's CEO/CFO has concluded that, subject to the
limitations noted above, our Disclosure Controls are effective to ensure that
material information relating to the Company is made known to management,
including the CEO/CFO, particularly during the period when our periodic reports
are being prepared, and that our Internal Controls are effective to provide
reasonable assurance that our financial statements are fairly presented in
conformity with accounting principals generally accepted in the United States.
Additionally, there has been no change in our Internal Controls that occurred
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to affect, our Internal Controls.
PART
II. - OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
2. Unregistered Sale of Equity Securities and Use of
Proceeds
None.