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 U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q 

(Mark One)

 

☑    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________

 

Commission File Number

 

INTREorg Systems, Inc.

(Exact name of registrant as specified in its charter)

 

Texas

  

45-0526215

(State or other jurisdiction of incorporation or organization)

  

(IRS Employer Identification No.)

 

556 SILICON DR., SUITE 103, SOUTHLAKE, TX

Southlake, TX 76092

817-416-6846

 (Issuer's telephone number)

 

(Former address)

Indicate by check mark whether the issuer (1) 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 [ ] No [ X ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).

Yes [ ] No [ X ]

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Ruble 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]

Accelerated filer [  ]

 

 

Non-accelerated filer [  ] (Do not check if a smaller reporting company)

Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [ X ]

 

The number of shares of Common Stock, no par value, issued and outstanding on June 5, 2015 was 14,219,419.

 

 
1

 

 

 

TABLE OF CONTENTS

 

Part I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

  5

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

  12

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

  15

 

Item 4.

Controls and Procedures

 

 

  15

 

 

 

 

 

 

 

Part II – OTHER INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

 

  16

 

Item 1A.

Risk Factors

 

 

  16

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

  16

 

Item 3.

Defaults Upon Senior Securities

 

 

  17

 

Item 4.

Mine Safety Disclosures

 

 

  17

 

Item 5.

Other Information

 

 

  17

 

Item 6.

Exhibits

 

 

  17

 

 

 

 

 

 

 

SIGNATURES

 

 

  18

 

 

 
2

 

 

INTRODUCTORY NOTE

 

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.

 

 

 

Special Note Regarding Forward-Looking Statements

 

This report contains forward-looking statements and information that are based on the beliefs of our management as well as assumptions made by and information currently available to us.  Such statements should not be unduly relied upon.  When used in this report, forward-looking statements include, but are not limited to, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as well as statements regarding new and existing products, technologies and opportunities, statements regarding market and industry segment growth and demand and acceptance of new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business, any statements of belief or intention, and any statements or assumptions underlying any of the foregoing.  These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions.  There are important factors that could cause actual results to vary materially from those described in this report as anticipated, estimated or expected, including, but not limited to: competition in the industry in which we operate and the impact of such competition on pricing, revenues and margins, volatility in the securities market due to the general economic downturn; Securities and Exchange Commission (the “SEC”) regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties.  Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward- looking statements, even if new information becomes available in the future.  Depending on the market for our stock and other conditional tests, a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available.  Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock.  Because we may from time to time be considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.

 

 
3

 

 

Item 1.        Financial Statements.

 

Contents

 

 

 

Balance Sheets at June 30, 2014 and December 31, 2013 (Unaudited)

5

 

 

Unaudited Statements of Operations for the three and six months ended June 30, 2014 and 2013

6

 

 

Unaudited Statements of Cash Flows for the six months ended June 30, 2014 and 2013

7

 

 

Unaudited Notes to Financial Statements

8

 

 

 
4

 

 

INTREorg Systems, Inc.

Balance Sheets

(Unaudited)

 

   

June 30,

   

December 31,

 
   

2014

   

2013

 
               

ASSETS:

               
                 

Current Assets:

               

Cash

  $ -     $ 51  

Prepaid expenses

    323       3,573  

Total Current Assets

    323       3,624  
                 

Licensing agreement

    18,750       25,000  

TOTAL ASSETS

  $ 19,073     $ 28,624  
                 
                 

LIABILITIES & STOCKHOLDERS' DEFICIT

               
                 

Current Liabilities

               

Accounts payable

  469,451     458,803  

Accounts payable - related parties

    200,636       149,962  

Accrued interest and other liabilities

    422,678       378,120  

Accrued contingencies

    453,290       453,290  

Notes payable

    521,000       521,000  

Revolving line of credit - related party

    392,233       295,231  

Total Current Liabilities

    2,459,288       2,256,406  
                 

Commitments and Contingencies

               
                 
Stockholders' Deficit                
                 

Preferred Stock, no par value; 10,000,000 shares authorized none issued and outstanding

    -       -  
                 

Common Stock, no par value; 100,000,000 shares authorized 12,994,872 and 12,845,072 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

    1,851,144       1,803,404  
                 

Additional paid in capital

    237,078       231,189  
                 

Accumulated deficit

    (4,528,437 )     (4,262,375 )
                 

Total stockholders' deficit

    (2,440,215 )     (2,227,782 )
                 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

  $ 19,073     $ 28,624  

 

 

The accompanying notes are an integral part of these financial statements.

 

 
5

 

 

INTREorg Systems, Inc.

Statements of Operations

(Unaudited)

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 
                                 

General and administrative expenses

  $ 136,863     $ 191,800     $ 228,231     $ 411,851  

Interest Expense

    10,556       10,556       20,994       20,994  

Interest expense- related party

    9,367       3,244       16,837       8,114  

Total operating expenses

    156,786       205,600       266,062       440,959  
                                 

Net loss

  $ (156,786 )   $ (205,600 )   $ (266,062 )   $ (440,959 )
                                 
                                 

Net loss per share of common stock

  $ (0.01 )   $ (0.02 )   $ (0.02 )   $ (0.04 )
                                 

Weighted average number of common shares outstanding

    12,935,771       12,394,679       12,907,357       12,313,112  

 

`

The accompanying notes are an integral part of these financial statements.

 

 
6

 

 

INTREorg Systems, Inc.

Statements of Cash Flows

(Unaudited)

 

   

For the Six Months Ended

 
   

June 30,

 
   

2014

   

2013

 
                 

Cash Flows from Operating Activities

               

Net Loss

  $ (266,062 )   $ (440,959 )

Adjustments to reconcile net loss to net cash used by operating activities

               

Common stock and options issued for services

    53,629       128,194  

Amortization and depreciation

    9,500       6,250  

Changes in operating assets and liabilities

               

Advances- related party

    -       20,000  

Increase in Accounts Payable

    10,648       159,247  

Increase in accounts payable related party

    50,674       60,257  

Increase in accrued interest and other liabilities

    44,558       -  
                 

Net Cash Flows Used by Operating Activities

    (97,053 )     (67,011 )
                 
                 

Net Cash Flows Provided (Used) by Investing Activities

    -       -  
                 

Cash Flows from Financing Activities

               

Increase in related party revolving line of credit

    97,002       40,951  
                 

Net Cash Flows Provided by Financing Activities

    97,002       40,951  
                 

Net Decrease in Cash

    (51 )     (26,060 )
                 

Cash at Beginning of Period

    51       26,060  
                 

Cash at End of Period

  $ -     $ -  
                 

Supplemental Disclosure of Cash Flow Informantion

               
                 

Cash paid for interest

  $ -     $ -  

Cash paid for taxes

  $ -     $ -  

 

The accompanying financial statements are an integral part of these financial statements.

 

 
7

 

 

INTREORG SYSTEMS, INC.

Notes to the Financial Statements

June 30, 2014

(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 $2,458,965 at June 30, 2014. During the three and six month periods ended June 30, 2014, the Company did not generate any revenues. At June 30, 2014, the Company had an accumulated deficit of $4,528,437.

 

The Company has not earned revenues from operations. The Company's ability to continue as a going concern is dependent upon its ability to raise the necessary capital to further implement its business plan, launch its operations 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, 2013 as filed with the SEC on April 10, 2015. 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, 2013 as reported in Form 10-K have been omitted.

 

 

 
8

 

 

Summary of Significant Accounting Policies

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued a new Accounting Standards Update, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 provides guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year of the date the financial statements are issued, and, if such conditions exist, to provide related footnote disclosures. The guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.

 

NOTE 2.   RELATED PARTY TRANSACTIONS.

 

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 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.

 

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, 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,

 

 
9

 

 

 

 •

 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 to the Line of Credit to change the conversion price from $1.00 per share to $0.25 per share. 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.

 

As of June 30, 2014, the Company owed Brech a principal of $392,233, plus accrued interest of $50,853. As of December 31, 2013, the Company owed Brech $295,231, plus accrued interest of $34,016. Accrued interest is recorded in accounts payable- related party. The maturity date on the Line of Credit was not amended. The balance is past due and is classified as a current liability. As of the date of this Report, Brech has not declared a default on the Line of Credit.

 

Cicerone Consulting Agreement

 

As of June 30, 2014 and December 31, 2013, Cicerone Corporate Development, LLC ("Cicerone") was owed $29,946 for reimbursable expenses on behalf of the Company, 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

 

On February 3, 2014, Darren Dunckel paid certain legal, accounting and other invoices on behalf of the Company aggregating $33,837. Such advances have not been repaid and are included in accounts payable- related parties.

 

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 June 30, 2014 and December 31, 2013 amounted to approximately $287,389 and $296,120, 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.      ACCRUED CONTINGENCIES.

 

As of June 30, 2014 and December 31, 2013, management estimated $453,290, as amounts for liabilities incurred by former management of the Company.

 

NOTE 5.     CAPITAL STOCK.

 

During the six months ended June 30, 2014, the Company authorized the issuance of 129,800 shares valued at $41,740, to Public Issuer Stock Analytics pursuant to the terms of the intellectual property license and consulting agreement the Company maintains with them.

 

On April 25, 2014, the Company authorized the issuance of 20,000 shares valued at $6,000 to PT Platinum Consulting, LLC for professional services related to financial reporting and accounting.

 

While we have not issued the certificates for these shares as of June 30, 2014, the issuance of the certificate is considered a ministerial act and we have reflected these shares as issued and outstanding at June 30, 2014. The shares have been issued as of the date of this Report.

 

 
10

 

 

 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.

 

Pursuant to the Software Development and Ongoing Maintenance Agreement (the “Software Development Agreement”) we entered into with Central Coast Technology Associates ("Central Coast") on June 13, 2013, we issued Central Coast options to purchase up to 1,000,000 shares of our common stock at an exercise price of $0.25 per share. The options vest in stages based on completion of work pursuant to the Software Development Agreement and also contain provisions for cashless exercise. If Central Coast fails to fully complete such services, we have the right to purchase such options for $1,000 and terminate the Software Development Agreement; provided however, that if Central Coast fails to complete only part of such services, we can purchase up to 50% of the options for $500. As of June 30, 2014, none of the options have vested.

 

On May 1, 2014, the Company granted Michael Farmer, a member of the board of directors, options to purchase 200,000 shares of the Company’s common stock at $3.00 per share and options to purchase 100,000 shares of the Company’s common stock at $1.00 per share. 25% of the options vest at the one year anniversary of the day of grant and 2.0833% each month thereafter. The options expire on May 1, 2017 and had an estimated grant date fair value of $105,997, which is recognized in expense over the three year vesting period. The Company used the Black Scholes option model to value the option awards. Stock option expense of $5,889 was recorded for the period ended June 30, 2014.

 

A summary of option activity as of June 30, 2014 and changes during the period then ended are presented below:

 

Options

 

Number of Options

   

Weighted Average Exercise Price

   

Weighted Average Remaining Contractual Term (in years)

   

Aggregate Intrinsic Value

 
                                 

Balance at January 1, 2013

    1,900,000     $ 1.24       3.20     $ 2,347,000  

Granted

    300,000       2.33       2.83       700,000.00  

Exercised

    -       -       -       -  

Expired

    -       -       -       -  
                                 

Balance at June 30, 2014

    2,200,000       1.39       2.82     $ 3,047,000  
                                 

Options exercisable at June 30, 2014

    900,000       2.33       1.50     $ 2,097,000  

 

 

NOTE 6.     SUBSEQUENT EVENTS

 

During the period from July 1, 2014 through June 4, 2015, the Company authorized the issuance of 20,000 shares per month to Public Issuer Stock Analytics pursuant to the terms of the intellectual property license and consulting agreement the Company maintains with them. The grants aggregated 200,000 shares valued at the closing price as of the date of grant for a total of $57,400.

 

In March 2015, the Company issued shares required to be issued for various services rendered to the Company resulting in the issuance of 1,024,547 shares. 

 

 
11

 

 

Item 2.  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2014 and 2013 and notes thereto contained elsewhere in this Reportand our annual  report on Form 10-K for the twelve months ended December 31, 2013 and 2012  including the consolidated financial statements and notes thereto. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements. See “Cautionary Note Concerning Forward-Looking Statements.”

 

Overview 

 

We were organized for the purpose of providing consulting and "back office" services to other companies. Our business plan is to become an integrated provider of Software as a Service (SaaS) applications, Stock Transfer Analytics (“STA”) software application and consulting. Our target market is publicly-traded, emerging growth companies. Our business plan is to engage customers using our proprietary STA software to help customers with compliance, fund raising and investor relations. We believe this will lead to additional opportunities to provide consulting services and/or SaaS for these companies.

 

Since inception we have been evaluating different models to carry out our business plan and develop the services and software we seek to offer to our customers. We have conducted years of test marketing of various software reporting and compliance tools. Over the years, between the trials of a new business and the slowing economy, we experienced managerial and employee turnover and have not always been able to afford to carry out our plans. However, we continued to maintain our SEC reporting and work on finding products and services that meets our criteria. We believe we have finally established the right business model, products and services, and management group to begin to implement our business plan. We have been exploring providing consulting services for publicly traded companies focusing on data and information regarding their shareholder base and trading activities. There have been preliminary meetings with possible vendors, clients and data providers, but no formal or definitive agreements (other than those described herein) have been entered as of the date of this filing. Since January 1, 2011, we have been focused on obtaining the licenses for software from PISA (as further described below), which is crucial for providing the consulting services we intend to offer and for researching the viability of pricing structures within the industry.

 

In October 2012, we executed an Intellectual Property License and Consulting Agreement (the “PISA Agreement”) with Public Issuer Stock Analytics, LLC (“PISA”) that provides us the exclusive right to market and sell services associated with certain proprietary intellectual property owned by PISA. PISA further agreed to act as a consultant to us, providing the actual services associated with the certain proprietary intellectual property. The term of the PISA Agreement is for three years. Under the PISA Agreement, PISA is entitled to the following compensation: 250,000 shares of Common Stock when the PISA Agreement was executed; 20,000 shares per month based on the closing price of our Common Stock on the last business day of each respective month (the "Share Royalty"); and 1%, 2% or 3% of gross sales, due on a quarterly basis, up and until the second anniversary, third anniversary or termination of the agreement, respectively (the "Gross Sales Royalty"). If no gross sales exist for a given period, PISA's only compensation for such period shall be the Share Royalty. The Gross Sales Royalty may be paid in cash or restricted shares of Common Stock; if paid in Common Stock, such stock shall be issued based on the market close on the last business day of each month in each quarter as such market close is found in Bloomberg. As of June 30, 2014, PISA has received the initial 250,000 shares of common stock due upon execution of the agreement and has received or is due an aggregate of 320,000 shares as Share Royalty and 10,200 shares as Gross Sales Royalty.

 

 
12

 

 

Our ability to fully implement our business plan is dependent both on implementing the licensing agreement with the related party as well as raising sufficient capital to fund the further development of our company. Going forward, we expect that our efforts will be focused on parallel courses to achieve both goals. While we have raised funds in private offerings, there are no assurances, however, that we will be able to raise all of the necessary capital to pursue all aspects of our business development.

 

Recent Events

 

On June 13, 2013, we signed a Software Development and Ongoing Maintenance Agreement (the “Software Development Agreement”) with Central Coast Technology Associates ("Central Coast"). Pursuant to the Software Development Agreement, Central Coast shall help us design, develop and deploy software platforms for our services, for which we agreed to compensate Central Coast $100 for each full hour expended in satisfaction of Central Coast's duties; provided however, that initially, the maximum hours to be compensated under the Software Development Agreement shall be 1,000, which is subject to adjustment upon proper notification and consent. Central Coast is responsible for keeping accurate records of time spent on services to be provided under the Software Development Agreement and shall be paid upon the completion of certain duties. In addition to the $100 per hour compensation described above, we also agreed to pay Central Coast an ongoing development fee of $250 for each full hour spent performing such services for our platform.

 

Central Coast also agreed that during the term of the Software Development Agreement and for the three-year period thereafter, it shall not provide software development services to our competitors.

 

Concurrently with executing the Software Development Agreement, we also granted options to Central Coast to purchase up to 1,000,000 shares of our common stock at an exercise price of $0.25 per share. The options vest in stages based on completion of work pursuant to the Software Development Agreement and contain provisions for cashless exercise. If Central Coast fails to fully complete its services, we have the right to repurchase such options for $1,000 and terminate the Software Development Agreement; provided however, that if Central Coast fails to complete only part of such services, we can repurchase up to 50% of the options for $500. As of June 30, 2014, none of the options had vested.

 

The Software Development Agreement shall continue in perpetuity until terminated, by giving written notice to the other party. Either party may terminate the Software Development Agreement at any time because of a material breach of the terms of the Software Development Agreement, failure to pay fees owed, mutual consent to terminate the agreement or if either party enters into liquidation or becomes unable to pay its debts. Our damages, if any, are limited to the amount of compensation we paid during the term of the Software Development Agreement. The Software Development Agreement also contains indemnification provisions.

 

Going Concern

 

We have incurred accumulated losses of approximately $4,528,437 since inception through June 30, 2014.  The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2013 contained 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.

 

Results of Operations

 

For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

 

During the fiscal quarters ended June 30, 2014 and 2013, we did not recognize any revenue from our operational activities. We do not expect to recognize revenues from our operational activities in 2014, as management is focused on the securing the licensing agreement with the related party as well as raising sufficient capital to fund the further development of our company.

 

 
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During the fiscal quarter ended June 30, 2014, we recognized general and administrative expenses of $136,863 compared to $191,800 during the same quarter in 2013. The decrease of $54,937 or 29% was a result of the decrease in legal and accounting fees. The decrease was partially offset by an increase in professional fees for investor relations services.

 

We expect that these expenses will increase during 2014 as we begin to further implement our business plan, although 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.

 

During the three months ended June 30, 2014, we recognized a net loss of $156,786, compared to $205,600 for the same quarter in 2013. The decrease of $48,814 was attributable to the decrease in legal and professional fees.

 

For the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

 

During the six month periods ended June 30, 2014 and 2013, we did not recognize any revenue from our operational activities. We do not expect to recognize revenues from our operational activities in 2014, as management is focused on the securing the licensing agreement with the related party as well as raising sufficient capital to fund the further development of our company.

 

During the six month period ended June 30, 2014, we recognized general and administrative expenses of $228,231 compared to $411,851 during the same period in 2013. The decrease of $183,620 or 45% was a result of the decrease in legal and accounting fees. The decrease was partially offset by an increase in professional fees for investor relations services.

 

During the six months ended June 30, 2014, we recognized a net loss of $266,062, compared to $440,959 for the same period in 2013. The decrease of $174,897 was attributable to the decrease in legal and professional fees.

 

 

Liquidity and Capital Resources

 

Six Months Ended June 30, 2014 and 2013

 

The following table sets forth a summary of our approximate cash flows for the periods indicated:

 

   

For the Six Months Ended

June 30

 
   

2014

   

2013

 

Net cash provided by (used in) operating activities

  $ (97,053

)

  $ (67,011

)

Net cash (used in) investing activities

  $ -     $ -  

Net cash provided by (used in) financing activities

  $ 97,002     $ 40,951  

 

Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. At June 30, 2014, we had a working capital deficit of $2,458,965 as compared to a working capital deficit of $2,252,782 at December 31, 2013. Historically we have relied upon debt funding and advances and loans from related parties to fund our cash needs. Our current liabilities increased approximately $202,882 at June 30, 2014 from December 31, 2013 primarily related to a net increase in accounts payable, accounts payable- related parties and accrued interest and other liabilities and the Brech revolver. Accounts payable increased $10,648, accounts payable- related parties increased $50,674 while accrued interest and other liabilities increased $44,558.

 

During the six months ended June 30, 2014, J.H. Brech, LLC made working capital advances totaling of 97,002. At June 30, 2014, we owed a total of $392,233 under the working capital line of credit.

 

Our balance sheet at June 30, 2014 included $453,290 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 June 30, 2014, we have $521,000 principal amount and $287,389 of accrued 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 in operating activities for the six months ending June 30, 2014 was $97,053 as compared to net cash used in operating activities of $67,011 for the period ending June 30, 2013. We did not generate or use any cash from investing activities during the six months ended June 30, 2014 and 2013. Cash flows provided by financing activities included an increase of $97,002 from a line of credit to a related party as compared to $40,951 for the period ended June 30, 2013.

 

 
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We have not generated any revenues and we are dependent upon advances from a related party to fund our ongoing general and administrative expenses and satisfy our obligations. We need to initially raise $500,000 to fund the initial launch of our business plan, in addition to funds necessary to satisfy our current obligations. In March 2011, we raised $100,000 in a private placement of our securities and we continue to seek the additional necessary capital. We do not, however, 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 in this Report. 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.

 

Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Not applicable.

 

Item 4.     CONTROLS AND PROCEDURES

 

The Company failed to timely file three periodic reports during the fiscal year ended December 31, 2014 and its quarterly report for March 31, 2015 which demonstrates that its Disclosure Controls and Procedures have been inadequate. However, the Company has been working diligently to file all outstanding reports and intends to file the outstanding periodic reports within the next few weeks.

 

Evaluation of Disclosure Controls and Procedures

 

Going forward from this filing, once flows from operations improve to a level where it is able to implement remediation plans, the Company intends to re-establish and maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

 

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a 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, 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. The design of any system of controls 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.

 

We carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based upon that evaluation, management concluded that our disclosure controls and procedures were not effective as of June 30, 2014, to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

 
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Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal control over financial reporting during the three month period ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any legal proceedings or claims that would require disclosure under Item 103 of Regulation S-K. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

ITEM 1A. RISK FACTORS

 

Not applicable.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Information on any and all equity securities we have sold during the period covered by this Report that were not registered under the Securities Act of 1933, as amended is set forth below:

 

During the quarter ended June 30, 2014, the Company authorized the issuance of 60,000 shares valued at $18,800 to Public Issuer Stock Analytics pursuant to the terms of the intellectual property license and consulting agreement the Company maintains with them.

 

All of the transactions listed above were made pursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(a)(2) of the Securities Act or Rule 506(b) of Regulation D promulgated thereunder, for sales not involving a public offering.  The securities issued have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

 
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None 

 

ITEM 6.  EXHIBITS

 

The following is a complete list of exhibits filed as part of this Form 10-Q.  Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.

 

10.1

Form of Agreement with Central Coast Technology Associates (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8K filed on June 18, 2013)

10.2

Form of Option Agreement for Central Coast Technology (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8K filed on June 18, 2013)

10.3

Consulting Agreement with Darren Dunckel (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8K filed on January 14, 2014)

10.4

Form of First Letter of Addendum and First Amendment to $500,000 8% Revolving Credit Note by and between the Company and J.H. Brech, LLC (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8K filed on August 28, 2014)

31.1

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)

  

  

31.2

Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)

  

  

32.1

Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)

  

  

32.2

Certification of the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)

 

101 Interactive Data Files (Filed herewith)
   

101.INS

XBRL INSTANCE DOCUMENT

   

101.SCH

XBRL TAXONOMY EXTENSION SCHEMA

   

101.CAL

XBRL TAXONOMY EXTENSION CALCULATION LINKBASE

   

101.DEF

XBRL TAXONOMY EXTENSION DEFINITION LINKBASE

   

101.LAB

XBRL TAXONOMY EXTENSION LABEL LINKBASE
   

101.PRE

XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

 
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SIGNATURES

 

 

Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 INTREorg Systems, Inc.     

 

 

Dated:   June 5, 2015

 

By:  /s/ Darren Dunckel

  Darren Dunckel 

  President and CEO

 

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