Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - INTREorg SYSTEMS INC. | Financial_Report.xls |
| EX-31.1 - INTREorg SYSTEMS INC. | iorg10qex311093011.htm |
| EX-32.1 - INTREorg SYSTEMS INC. | iorg10qex321093011.htm |
| EX-31.2 - INTREorg SYSTEMS INC. | iorg10qex312093011.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
Form 10-Q
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[√]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2011
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or
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[ ]
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________________ to __________________________
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Commission file number: 0-53262
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INTREorg Systems, Inc.
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(Name of registrant as specified in its charter)
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Texas
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45-0526215
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2600 E. Southlake Blvd., Suite 120-366, Southlake, TX
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76092
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(Address of principal executive offices)
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(Zip Code)
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(817) 491-8611
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(Registrant's telephone number, including area code)
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not applicable
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(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 10,520,016 shares of common stock are issued and outstanding as of November 15, 2011.
TABLE OF CONTENTS
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Page No
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PART I. - FINANCIAL INFORMATION
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Item 1.
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Financial Statements.
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3
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations.
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9
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Item 3.
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Quantative and Qualitative Disclosures About Market Risk.
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11
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Item 4.
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Controls and Procedures.
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11
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PART II - OTHER INFORMATION
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Item 1.
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Legal Proceedings.
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11
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Item 1A.
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Risk Factors.
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11
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds.
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11
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Item 3.
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Defaults Upon Senior Securities.
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11
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Item 4.
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(Removed and Reserved).
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11
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Item 5.
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Other Information.
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11
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Item 6.
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Exhibits.
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11
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include, among others, the following:
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our ability to raise sufficient working capital necessary to continue to implement our business plan and satisfy our obligations,
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our ability to continue as a going concern,
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our ability to develop revenue producing operations,
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our ability to establish our brand and effectively compete in our target market, and
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risks associated with the external factors that impact our operations, including economic and leisure trends.
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Forward-looking statements are typically identified by use of terms such as “may”, “could”, “should”, “expect”, “plan”, “project”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “pursue”, “target” or “continue”, the negative of such terms or other comparable terminology, although some forward-looking statements may be expressed differently. The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. You should also consider carefully the statements under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2010 which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Item 1A. - Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2010. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report the terms “INTREorg,” "we"", "our", the "Company" and similar terms refer to INTREorg Systems, Inc., a Texas corporation. In addition, when used herein and unless specifically set forth to the contrary, “Third Quarter 2011” refers to the three months ended September 30, 2011, “third Quarter 2010” refers to the three months ended September 30, 2010, “2010” refers to the year ended December 31, 2010 and “2011” refers to the year ending December 31, 2011. The information which appears on our website at www.intreorg.com is not part of this report.
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
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INTREorg Systems, Inc.
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(A Development Stage Company)
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Balance Sheets
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September 30,
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December 31,
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2011
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2010
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(Unaudited)
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ASSETS:
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Current Assets:
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Cash
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$ | 11 | $ | 52 | ||||
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Prepaid expenses
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- | 1,173 | ||||||
| Total Current Assets | 11 | 1,225 | ||||||
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TOTAL ASSETS
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$ | 11 | $ | 1,225 | ||||
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current Liabilities
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Accounts payable
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$ | 295,794 | $ | 314,753 | ||||
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Accounts payable - releated party
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36,817 | - | ||||||
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Accrued interest and other liabilities
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239,326 | 184,768 | ||||||
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Accrued contingencies
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483,237 | 486,137 | ||||||
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Advances - related party
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- | 104,644 | ||||||
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Notes payable
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521,000 | 521,000 | ||||||
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Convertible promissory notes - related party
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471,202 | - | ||||||
| Total Current Liabilities | 2,047,376 | 1,611,302 | ||||||
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Long-Term Liabilities
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Revolving line of credit - related party
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158,959 | - | ||||||
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Convertible promissory notes - related party - net of current portion
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- | 471,202 | ||||||
| Total Liabilities | 2,206,335 | 2,082,504 | ||||||
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Stockholders' Deficit
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Preferred Stock, no par value; 2,000,000 shares authorized,
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none issued and outstanding
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- | - | ||||||
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Common Stock, no par value; 100,000,000 shares authorized
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10,520,016 and 10,320,016 shares issued and outstanding at September 30, 2011
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and December 31, 2010, respectively
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751,455 | 559,455 | ||||||
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Additional paid in capital
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74,815 | - | ||||||
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Deficit accumulated during the development stage
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(3,032,594 | ) | (2,640,734 | ) | ||||
| Total stockholders' deficit | (2,206,324 | ) | (2,081,279 | ) | ||||
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
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$ | 11 | $ | 1,225 | ||||
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The accompanying notes are an integral part of these financial statements.
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3
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INTREorg Systems, Inc.
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(A Development Stage Company)
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Statements of Operations
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(Unaudited)
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November 3, 2003
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For the Three Months Ended
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For the Nine Months Ended
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(Inception) to
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September 30,
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September 30,
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September 30,
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2011
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2010
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2011
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2010
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2011
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Revenue
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$ | - | $ | - | $ | - | $ | - | $ | 750 | ||||||||||
| Depreciation | - | - | - | 379 | 15,585 | |||||||||||||||
| General and administrative | 138,879 | 20,430 | 337,302 | 84,539 | 2,835,941 | |||||||||||||||
| Total Expenses | 138,879 | 20,430 | 337,302 | 84,918 | 2,851,526 | |||||||||||||||
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Operating Loss
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(138,879 | ) | (20,430 | ) | (337,302 | ) | (84,918 | ) | (2,850,776 | ) | ||||||||||
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Other Income / (Expense)
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| Debt forgiveness and other | - | - | - | - | 166,902 | |||||||||||||||
| Interest Expense | (20,563 | ) | (17,268 | ) | (54,558 | ) | (51,263 | ) | (348,720 | ) | ||||||||||
| Total other income / (expense) | (20,563 | ) | (17,268 | ) | (54,558 | ) | (51,263 | ) | (181,818 | ) | ||||||||||
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Net Loss
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$ | (159,442 | ) | $ | (37,698 | ) | $ | (391,860 | ) | $ | (136,181 | ) | $ | (3,032,594 | ) | |||||
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Net Loss per share of common
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stock - basic and diluted
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$ | (0.02 | ) | $ | (0.00 | ) | $ | (0.04 | ) | $ | (0.01 | ) | ||||||||
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Weighted average number of common
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| shares outstanding - basic and diluted | 10,460,016 | 10,320,016 | 10,410,053 | 10,320,016 | ||||||||||||||||
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The accompanying notes are an integral part of these financial statements.
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4
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INTREorg Systems, Inc.
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(A Development Stage Company)
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Statements of Cash Flows
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(Unaudited)
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November 3, 2003
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For the Nine Months Ended
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(Inception) to
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September 30,
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September 30,
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2011
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2010
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2011
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Cash Flows from Operating Activities
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Net Loss
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$ | (391,860 | ) | $ | (136,181 | ) | $ | (3,032,594 | ) | |||
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Adjustments to reconcile net loss to net cash used
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by operating activities:
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Common stock and warrants for services
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166,815 | - | 425,670 | |||||||||
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Depreciation
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- | 379 | 16,372 | |||||||||
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Reserve for investment
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- | 1,000 | ||||||||||
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Changes in operating assets and liabilities
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- | |||||||||||
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(Increase) decrease in prepaid expenses
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1,173 | - | ||||||||||
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Increase in accounts payable and accrued expenses
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35,599 | 135,841 | 1,006,322 | |||||||||
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Increase in accounts payable related party
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36,817 | 36,817 | ||||||||||
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Increase / (decrease) in accrued contingencies
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(2,900 | ) | - | 483,237 | ||||||||
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Net Cash Flows Used by Operating Activities
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(154,356 | ) | 39 | (1,063,176 | ) | |||||||
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Cash Flows from Investing Activities
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Acquisition of fixed assets
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- | - | (16,372 | ) | ||||||||
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Acquisition of investments
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- | - | (1,000 | ) | ||||||||
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Net Cash Flows Provided (Used) by Investing Activities
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- | - | (17,372 | ) | ||||||||
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Cash Flows from Financing Activities
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Cash overdraft
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- | - | - | |||||||||
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Increase / (decrease) in loans payable
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- | - | 521,000 | |||||||||
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Proceeds from line of credit, net
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54,315 | - | 54,315 | |||||||||
| Proceeds from related party advances | - | - | 104,644 | |||||||||
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Proceeds from sale of common stock
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100,000 | - | 153,500 | |||||||||
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Issuance of Preferred A Stock
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- | - | 247,100 | |||||||||
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Net Cash Flows Provided by Financing Activities
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154,315 | - | 1,080,559 | |||||||||
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Net (Decrease) Increase in Cash
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(41 | ) | 39 | 11 | ||||||||
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Cash at Beginning of Period
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52 | 13 | - | |||||||||
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Cash at End of Period
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$ | 11 | $ | 52 | $ | 11 | ||||||
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Supplemental Disclosure of Cash Flow Information
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Cash paid for interest
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$ | - | $ | - | $ | 32,008 | ||||||
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Cash paid for taxes
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$ | - | $ | - | $ | - | ||||||
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Supplemental Disclosure of Non-Cash Flow Information
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Debt converted to Convertible Notes Payable
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$ | - | $ | - | $ | 471,202 | ||||||
| Reclass of related party advances to | ||||||||||||
| revolving line of credit - related party | $ | 104,644 | $ | - | $ | 104,644 | ||||||
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The accompanying notes are an integral part of these financial statements.$
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5
INTREORG SYSTEMS, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2011
(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.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and nine month periods ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.
The Company's 10-K for the year ended December 31, 2010, filed on April 14, 2011, should be read in conjunction with this report.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Development Stage Company
The Company has not earned significant revenues from limited principal operations. Accordingly, the Company's activities have been accounted for as those of a Development Stage Enterprise. Among the disclosures required are that the Company's financial statements be identified as those of a development stage company, and that the statements of operations, stockholders' deficit and cash flows disclose activity since the date of the Company's inception.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2. RELATED PARTY TRANSACTIONS.
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 funding for our operations. Under the terms of the 8% revolving credit note, we have access of up to $500,000. Fundings under this line of credit are presently in abeyance. Management expects fundings will restart in the next several months. In the meantime, management is evaluating other, short-term, related party financing.
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:
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June 19, 2014, or
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the date on which we receive at least $1.5 million in gross proceeds through one or a series of transactions.
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6
INTREORG SYSTEMS, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2011
(Unaudited)
NOTE 2. RELATED PARTY TRANSACTIONS (continued).
At the Company’s sole discretion, we can pay the interest in shares of our common stock valued as follows:
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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
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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.
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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:
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our failure to pay the interest and principal when due,
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a default by us under the terms of the note,
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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,
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a liquidation of our company or a sale of all or substantially all of our assets, or
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a change of control of our company as defined in the note.
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At September 30, 2011, the Company owes this related party $158,959 for amounts advanced to the Company for working capital expenses. During the nine months ended September 30, 2011 $54,315 was advanced under this arrangement. During 2011, the Compnay reclassified the $104,644 balance of related party advances to this line of credit.
Convertible notes payable to a related party consist of three notes totaling $471,202, and were extended on April 4, 2011 to a maturity date of April 21, 2012, accrue interest of 6% per annum, and provide for payments of the accrued interest to be made on an annual basis. If the Company defaults on the interest payments, it incurs a daily $50 late fee for a maximum of 10 days. If the default is not cured, the interest rate on the unpaid principal is increased to 18% per annum, compounding annually and due on demand. At the discretion of the note holder, all or any part of the outstanding principal and accrued but unpaid interest due under the notes is convertible into shares of the Company's common stock at $1.00 per share. Accrued and unpaid interest on all of the notes at September 30, 2011 totaled $69,447.
Effective May 23, 2011, the Company entered into a Consulting Agreement (the “Cicerone Agreement”) with Cicerone Corporate Development, LLC, one of the Company’s principal shareholders (“Cicerone”). Pursuant to the Cicerone Agreement, Cicerone will provide consulting services relating to the implementation of corporate strategies, achievement of market listing standards, debt and equity financings, and corporate governance and shareholder matters. The Cicerone Agreement shall remain in effect until November 23, 2011. Notice of termination may be given by either party upon 30 days’ prior written notice commencing six months after the effective date of the Cicerone Agreement.
As its consulting fee under the Cicerone Agreement, Cicerone is entitled to receive, on a monthly basis, 20,000 shares of common stock and 20,000 warrants with a term of two years from the date of issuance, and exercises prices are based on the closing market price on the day of issuance and provide for a cashless exercise. Under the Agreement, the Company has also agreed to reimburse Cicerone’s pre-approved reasonable and necessary expenses incurred in connection with providing its consulting services. As of September 30, 2011 Cicerone is owed $36,817 for reimbursable expenses on behalf of the Company.
The total fair value of the warrants at the date of grant for the three and nine months ended September 30, 2011 was $.43 to $.93 per share based on the Black-Scholes pricing model, resulting in consulting expense of $41,735 and $74,815, respectively. The warrants were valued using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield of 0.35%, annual volatility of between 185% - 207%, risk free interest rate of 0%, and expected life of 2 years.
7
INTREORG SYSTEMS, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 2011
(Unaudited)
NOTE 2. RELATED PARTY TRANSACTIONS (continued).
The grant date fair value of the common stock for the three and nine months ended September 30, 2011 ranged from $.55 to $1.20 per share, resulting in consulting expense of $49,000 and $92,000, respectively.
As of September 30, 2011, Cicerone was due an aggregate of 40,000 shares of common stock under the terms of this agreement, with a grant date fair value of approximately $27,000. While we had not issued the certificate as of September 30, 2011, the issuance of the certificate is considered a ministerial act we have reflected these shares as issued and outstanding at September 30, 2011.
NOTE 3. NOTES PAYABLE.
The Company’s notes payable totaling $521,000 bear interest at per annum rates from 6% to 10%. Accrued and unpaid interest at September 30, 2011 is $169,584 and is included with Accrued interest and other liabilities in the accompanying financial statements. As of September 30, 2011, all of the Company’s notes payable are past due.
NOTE 4. CAPITAL STOCK TRANSACTIONS.
In additional to the stock and warrant activity described in Note 2, the Company, during the nine months ended September 30, 2011, received $100,000 for the sale of 100,000 shares of common stock at $1.00 per share to a related party.
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. At September 30, 2011 the Company has not made any grants under the Plan.
NOTE 5. COMMITMENTS AND CONTINGENCIES.
At September 30, 2011, management estimates there is a potential liability $483,237, related to the operations under the former management of the Company. The contingent amount 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, 2011 or since, through the date of these financial statements.
8
The following discussion of our financial condition and results of operations for the three months and nine months ended September 30, 2011 and 2010 should be read in conjunction with the financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Item 1A. Risk Factors and Cautionary Notice Regarding Forward-Looking Statements and Business sections of our Annual Report on Form 10-K for the year ended December 31, 2010. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Overview
We are a development stage company that was organized for the purpose of providing internet consulting and "back office" services to other companies. Our business plan is to become an integrated provider of outsourced IT services, Software as a Service (SaaS) applications, enterprise support, and business process outsourcing services. Our target market is publicly-traded, emerging growth companies in need of rapidly expanded IT services. Primarily we intend to focus on publicly traded companies to allow us to evaluate the financial position and business situation of prospective clients due to the inherent transparency required with publicly traded firms. Our business plan is to deliver services that include the selection and implementation of packaged software and the design, construction, testing, and integration of new systems. We expect that our outsourcing services segment will provide help desk and infrastructure support around-the-clock for our clients.
We have been exploring consulting services to publicly traded companies focusing on data and information regarding their shareholder base and trading activities. It is expected that these services would integrate with both the Infrastructure Solutions and the Consulting and Applications Solutions business strategies that we have developed. There have been exploratory meetings with possible vendors, clients and data providers. During 2011 our efforts have been focused on obtaining the licensing for software from a related party which would be crucial for providing the consulting services, as well as researching the viability of pricing structures within the industry. At this time there is one client that has been utilizing the consulting service on a test basis, however, because of the speculative nature of the services, more analysis will be required before any further disclosures are appropriate.
As described later in this section, our ability to fully implement our business plan is dependent both on securing the licensing agreement with the related party as well as raising sufficient capital to fund the further development of our company. During 2011 we expect that our efforts will be focused on parallel courses to achieve both of these goals. There are no assurances, however, that we will be able to raise the necessary capital and without access to funding we will be unable to pursue other aspects of our business development.
Going Concern
We reported a net loss of $391,860 for the nine months ended September 30, 2011 and we have incurred net losses of approximately $3.0 million since inception through September 30, 2011. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2010 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our operating losses and need to raise additional capital. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances we will be successful in our efforts to increase our revenues and report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.
Plan of Operations
To date, we have funded our activities through debt as well as through working capital advances from related parties and proceeds from the sale of our equity. Although we have entered into a $500,000 revolving line of credit provided to us by a related party, of which $158,959 was outstanding at September 30, 2011, this credit line is not sufficient to fund all costs necessary to implement the first phase of our business model and our access to this line is presently in abeyance. In order to fully organize our company and implement the first phase of our business model, we will need to raise approximately $500,000 in additional capital to the funds necessary to satisfy our existing obligations. We raised $100,000 of this amount during March 2011 and April 2011. Given the development stage nature of our company and the current status of the capital markets, however, there are no assurances we will be able to raise the balance of the necessary capital. Even if we are ultimately able to raise the capital, there are no assurances that our business model will be successful or that we will ever generate revenues from our operations.
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Results of Operations
Our total operating expenses for the Third Quarter 2011 and the nine months ended September 30, 2011 increased approximately 580% and approximately 297%, respectively, from the comparable periods in 2010. The increases in the 2011 periods are primarily attributable to increases in legal and professional fees associated with negotiation of the aforedescribed license agreement and related business development efforts, together with increases in accounting fees related principally related timing for fees for the audit of our 2010 financial statements, together with increased consulting fees associated with the consulting agreement entered into with Cicerone Corporate Development, LLC in May 2011 and approximately $9,000 of additional consulting fees paid to a individual for providing services to us related to development of marketing materials and a website update. We expect general and administrative expenses will continue to increase during the balance of 2011, however, we are unable at this time to quantify the actual amount of this anticipated increase as it will be based upon our varying level of operations.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. At September 30, 2011 we had a working capital deficit of $2,047,365 as compared to a working capital deficit of $1,610,077 at December 31, 2010. We have relied upon debt funding and advances and loans from related parties to fund our cash needs. Our current liabilities increased approximately 27% at September 30, 2011 from December 30, 2010 primarily related to amounts due a related party and our lack of sufficient working capital. Accounts payable decreased approximately 6% and accrued expenses and liabilities, which primarily include accrued but unpaid interest on our various debt obligations, increased approximately 30%. The amounts due under the revolving line of credit to J.H. Brech, LLC, a related party, also increased 52% at September 30, 2011 from December 31, 2010. At September 30, 2011 we also owed two related parties, including J.H. Brech, LLC and its managing partner, Mr. Charles J. Webb, an aggregate of $471,202 of principal and $65,324 of accrued interest under the terms convertible promissory notes. These notes, which are convertible at the option of the holders into shares of our common stock at a conversion price of $1.00 per share, mature between April 10, 2012 and April 21, 2012.
Our balance sheet at September 30, 2011 includes $483,237 of accrued contingencies. This amount represents an estimate of certain operating liabilities which may have been incurred by prior management that we are unable to confirm.
At September 30, 2011 we have $521,000 principal amount and $166,057 of accrued but unpaid interest due under the terms of various promissory notes to third parties. These notes, which are unsecured, are all in default and we do not have sufficient funds to repay these obligations. As a result of the default, the note holders could enforce their rights under these notes at any time.
Net cash used by operating activities in for the nine months ended September 30, 2011 was $154,356 as compared to net cash used in operating activities of $39 in the nine months ended September 30, 2010. During the 2011 period, net cash used in operating activities included a decrease in accrued contingences resulting from the satisfaction of certain of these aged payables offset by increases in prepaid expenses and accounts payable and accrued expenses. During the 2010 period, net cash used in operating activities included an increase in accounts payable and accrued expenses. Net cash provided by financing activities for the nine months ended September 30, 2011 reflects $100,000 in proceeds received from the sale of securities and additional draws under the related party revolving credit line. Net cash provided by financing activities for the nine months ended September 30, 2010 were $0. We did not generate or use any cash from investing activities in either the nine months ended September 30, 2011 or 2010.
We have generated minimal revenues and we are dependent upon advances from a related party to fund our ongoing general and administrative expenses and satisfy our obligations. During the first nine months of 2011 we raised $100,000 through the sale of our common stock in a private transaction, but we will need to raise and additional $400,000 to fund the initial launch of our business plan, in addition to funds necessary to satisfy our current obligations. We do not have any agreements or understanding with any third party to provide this financing. Until we can raise the necessary funds, we will be unable to further implement our business plan. Given the development stage nature of our company and the thinly traded nature of the public market for our common stock, there are no assurances we will be able to raise the necessary capital. If we are unable to raise capital as necessary, our ability to continue as a going concern is in jeopardy and investors could lose their entire investment in our company.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A summary of significant accounting policies is included in Note 1 to the financial statements included elsewhere in this report. Our management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for a smaller reporting company.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures 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 goals under all potential future conditions. Based on his evaluation as of the end of the period covered by this report, our Chief Executive Officer who also serves as our principal financial and accounting officer, has concluded that our disclosure controls and procedures were effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
Not applicable for a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None.
Item 6. Exhibits.
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No.
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Description
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4.1
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Form of Warrant issued to Cicerone Corporate Development, LLC *
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31.1
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Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer *
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31.2
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Rule 13a-14(a)/ 15d-14(a) Certification of principal financial and accounting officer *
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32.1
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Section 1350 Certification of Chief Executive Officer and principal financial and accounting officer *
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101
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Interactive Data File **
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101.SCH
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101.CAL
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101.LAB
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101.PRE
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101.DEF
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* filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities 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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INTREorg Systems, Inc.
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November 21, 2011
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By: /s/ Donal R. Schmidt
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Donal R. Schmidt, Jr., Chief Executive Officer,
principal executive officer, principal financial
and accounting officer
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