ITEM 1A
RISK FACTORS.
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
ITEM 1B
ITEM 1B
UNRESOLVED STAFF COMMENTS.
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item, however there are no unresolved staff comments.
ITEM
DESCRIPTION OF PROPERTY.
During the first quarter of 2008, our principal executive office moved to 1217 South Flagler Drive, 3 rd Floor, West Palm Beach, Florida 33401. As of June 25, 2008, the Company has entered into a sublease for office space in West Palm Beach, Florida. The lease has a term of one year, with an option to renew for an additional year and the leased space consists of approximately 411 square feet. The lease requires twelve monthly payments of approximately $1,390 through June 2009. We do not own any real property.
ITEM
LEGAL PROCEEDINGS.
None.
ITEM
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Since our spin-off from Sentigen in late 2006, our common stock has been listed for quotation on the OTC Bulletin Board under the symbol “SSRC.” The following table sets forth for the period indicated, the high and low prices for our common stock. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Holders
As of March 15, 2009, we had 48 stockholders of record.
Dividends
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent upon then existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that the Board of Directors considers relevant.
Equity Compensation Plan Information
The following table provides certain information as of December 31, 2008 with respect to our equity based compensation plans.
(1) Column (a) and (b) represent the aggregate shares issuable upon exercise of outstanding ten-year stock options granted from May 2007 through May 2008 to certain consultants to the Company and the two non-officer directors of the Company. These options vest at various times with the last options vesting on May 14, 2018.
ITEM
SELECTED FINANCIAL DATA.
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
ITEM
MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS.
Introduction
We were previously a wholly-owned subsidiary of Sentigen. Sentigen and its then subsidiary, Sentigen Biosciences, previously owned all right and title to the olfaction intellectual property assets. Prior to its merger with Invitrogen, Sentigen separated its olfaction intellectual property assets from the businesses acquired by Invitrogen. This separation was accomplished through the contribution of Sentigen’s olfaction intellectual property assets to us on October 10, 2006 and the subsequent spin-off in which Sentigen distributed 100% of its ownership interest in us to its then stockholders on December 1, 2006.
To date, we have incurred substantial operating losses. While we believe our technology capabilities in the olfaction area are substantial, as of December 31, 2008, we held three patents directly with another patent being issued under our Columbia License. We cannot provide any assurance that our additional patent applications will be successful. We intend to continually review the commercial validity of our olfaction technology in order to make the appropriate decisions as to the best way to allocate our limited resources.
Critical Accounting Policies and Use of Estimates
The SEC defines critical accounting policies as those that are, in management’s view, important to the portrayal of our financial condition and results of operations and demanding of management’s judgment. Our critical accounting policies include:
Impairment of intangibles
Our intangible assets consist of license and patent costs of $89,655 as of December 31, 2008, as compared with $112,263 as of December 31, 2007, and are the result of the Columbia License and certain patents. The value of the license reflects the closing share price of Sentigen's common stock on April 10, 2000 (the closing date of the Columbia License) multiplied by the 75,000 shares of Sentigen common stock issued to Columbia University less accumulated amortization. The value of the license is subject to an amortization period of 10 years. The value of the patents mainly consists of legal fees and is being amortized over the remaining term of the license. Management reviews the value of the license and patents for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. A review for impairment was conducted by an outside firm that concluded the fair market value of the olfaction technology was between $120,000 and $190,000 as of August 2006. The license and patent are considered to be impaired when the carrying value exceeds the calculation of the undiscounted net future cash inflows or fair market value. An impairment loss of $122,996 was recognized as amortization expense in August 2006 in connection with the license. We believe no further impairment loss is necessary as of December 31, 2008.
Off-Balance-Sheet Arrangements
As of December 31, 2008, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.
Results of Operations
General
We are a development stage company as defined in Financial Accounting Standard Board (“FASB”) Statement No. 7, “Accounting and Reporting by Development Stage Enterprises.” Other than with regard to the development and protection of our intellectual property, our planned principal operations have not yet commenced. We intend to establish a new business. We have not generated any revenues from operations and have no assurance of any future revenues. All losses accumulated since commencement of our business have been considered as part of our development stage activities.
Prior to the spin-off on December 1, 2006, our business was operated within Sentigen as part of its broader corporate organization rather than as a stand-alone company. Historically, Sentigen performed certain corporate functions for us. Our historical financial statements included herein do not reflect the expense of certain corporate functions we would have needed to perform if we were not a wholly-owned subsidiary. Following the spin-off, Sentigen no longer provided assistance to us and we are responsible for the additional costs associated with being an independent public company, including costs related to corporate governance, quoted securities and investor relations issues. Therefore, you should not make any assumptions regarding our future performance based on the financial statements.
Our financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities. Funding for the year ended December 31, 2008 was obtained in part, through $106,914 in loans made to us by Mr. Pagano, our Chief Executive Officer and Chairman. In addition, on May 9, 2008 and June 20, 2008, we closed on a $750,000 financing and a $145,980 financing, respectively, with certain of our largest stockholders, including our Chief Executive Officer and Chairman and another member of our Board of Directors. On July 9, 2008, two investors who participated in the May 9, 2008 and June 20, 2008 financings exercised their overallotment options for an aggregate amount of $54,020. In addition, certain of our indebtedness was cancelled in connection with the financings. See “-Liquidity and Capital Resources” below for a discussion of our financings and loans. We believe that our limited financial resources, inclusive of the foregoing amounts, are sufficient to fund operations and capital requirements for the next twelve months. We may, however, need substantial amounts of additional financing to commercialize the research programs undertaken by us, which financing may not be available on favorable terms, or at all.
Our ability to obtain financing and realize revenue depends upon the status of future business prospects, as well as conditions prevailing in the capital markets. These factors, among others, raise doubt about our ability to continue as a going concern should we be unable to realize revenues from our olfaction technology or raise sufficient additional funds in the future.
Our Chief Executive Officer and Board of Directors are also seeking opportunities with non-profit agencies and with potential commercial partners to leverage our olfaction intellectual property for the development of control agents for biting insects, in particular, insect vectors of malaria and other diseases.
Product Research and Development
We intend to continually review the commercial validity of the olfaction technology, in order to make the appropriate decisions as to the best way to allocate our limited resources. We currently do not have any research and development grant applications outstanding nor can we predict whether we will receive any research and development funding during the next twelve (12) months. We are unable at this time to predict a level of spending, if any, for product research and development activities during the next twelve (12) months, all of which will be dependent upon the implementation of our business plan. Our executive officer and Board of Directors have and intend to continue to seek opportunities with non-profit agencies and with potential commercial partners to leverage our olfaction intellectual property for the development of control agents for biting insects, in particular, insect vectors of malaria and other diseases.
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the purchase or sale of any material property, plant or equipment during the next 12 months.
Operating Expenses
For the year ended December 31, 2008, we had general and administrative costs of $582,372, compared to $237,431 for the year ended December 31, 2007. The increase in general and administrative costs is primarily due to an increase in professional fees of approximately $144,000, an increase of approximately $68,000 for a full year of a new employee’s salary and benefits, an increase in rent and office expenses of approximately $35,000 and an increase in travel expenses, related to our office relocation and our attempts to locate a market for our olfaction intellectual property, of approximately $72,000. In addition, 525,000 shares of stock options were granted during the year which resulted in an expense of $28,542. The increase in professional fees is due to costs incurred for our general compliance and corporate governance.
Amortization expense includes the amortization of our license and patent costs. During the current year, we were issued a patent in Mexico. For the period April 10, 2000 (Commencement of Predecessor Business) to December 31, 2008, amortization expense was $426,067. The original value of the license of $440,625 reflects the closing share price of Sentigen’s common stock on April 10, 2000. The value of the patent of $75,097 mainly consists of legal and application fees. The value of the license and patent, net of amortization as of the year ended December 31, 2008 and 2007, was $89,655 and $112,263, respectively. The remaining licensing and patent costs are being amortized on a straight line basis through April 2010.
Liquidity and Capital Resources
We have incurred operating losses since inception. As of December 31, 2008, we had $198,187 in cash and cash equivalents, compared to $42,500 at December 31, 2007. Our working capital at December 31, 2008 was $77,005, compared to a working capital deficit of $259,542 at December 31, 2007. Net cash used in operating activities for the year ended December 31, 2008 was $550,633 mainly attributable to our net loss of $642,303 and cash paid for security deposits of $4,170, offset in part by amortization of license and patent costs of $55,823, stock-based compensation expense of $28,542 and an increase in accounts payable and accrued expenses of $11,475. Net cash used in operating activities for the year ended December 31, 2007 was $163,511 mainly attributable to our net loss of $286,544 offset in part by amortization of license and patent costs of $38,711, stock-based compensation expense of $1,490, and an increase in accounts payable and accrued expenses of $82,832.
During the second quarter of 2008, as previously disclosed, we closed on a financing for an aggregate amount of $950,000. On May 9, 2008, we closed on the first tranche of the financing, for an aggregate amount of $750,000, which consisted of cash in the amount of $563,986 and the conversion of $186,014 of indebtedness. Participants in the first tranche of the financing subscribed for an aggregate of 3,947,363 shares of common stock, based on the closing price of $0.19 per share of our common stock on the closing date. On June 20, 2008, we closed on the second tranche of the financing, for an aggregate amount of $200,000 of which $145,980 was subscribed for, consisting of cash in the amount of $62,240 and the conversion of $83,740 of indebtedness. Participants in the second tranche of the financing subscribed for an aggregate of 768,315 shares of common stock, based on the closing price of $0.19 per share of our common stock on the closing date. In the third quarter of 2008, two participants in the financing elected to exercise their over-allotment options, which consisted of cash in the amount of $54,020. The participants who exercised their over-allotment options subscribed for an aggregate of 337,424 shares of common stock, based on the closing price of $0.16 per share of our common stock. Issuance of the shares were subject to stockholder approval of the amendment to our certificate of incorporation to increase the number of shares of common stock, which was approved by the stockholders at our 2008 annual meeting on June 24, 2008.
Ten of our largest stockholders (each holding 50,000 or more shares of our common stock) subscribed in the May 2008 financing, of which the following are holders of 5% or more of our common stock: Joseph K. Pagano, Frederick R. Adler, Longview Partners L.P., The Joseph A. Pagano Jr. 2007 Trust and Samuel A. Rozzi, who subscribed for $122,325, $109,350, $112,125, $100,350 and $95,775, respectively. Also, Mr. Pagano serves as our Chairman and Chief Executive Officer, and Mr. Adler is a member of our Board of Directors. The general partner of Longview Partners L.P. is Susan Chapman, an adult daughter of Mr. Adler.
The funds raised in the financing were used for general working capital purposes, including the funding of research and development efforts and the pursuit of a joint venture or other form of collaboration with another entity or entities. Our ability to obtain financing and realize revenue depends upon the status of future business prospects, as well as conditions prevailing in the capital markets. It is possible that any such additional financing may be dilutive to current stockholders and the terms of any debt financings could contain restrictive covenants limiting our ability to do certain things, including paying dividends.
On June 21, 2007, we issued a demand promissory note in favor of each of Mr. Frederick R. Adler, Mr. Joseph K. Pagano, D.H. Blair Investment Banking Corp. and Mr. Samuel A. Rozzi (together, the “Lenders”), evidencing loans extended to us in the principal amount of $50,000, $50,000, $50,000 and $30,000, respectively, by the Lenders, for an aggregate amount of $180,000. The promissory notes accrued interest at Citibank N.A.’s reported prime rate plus 3%, which was due and payable at the time the principal amount of each respective promissory note becomes due. Although the promissory notes had a maturity date of June 22, 2009, each Lender could demand the payment of all of the outstanding principal and interest of his or its respective promissory note at any time prior to the maturity date. At the time of the loan transaction, each of the Lenders was the beneficial owner of a significant number of shares of our common stock. In addition, Mr. Pagano is our Chief Executive Officer and the Chairman of our Board of Directors, and Mr. Adler is a member of our Board of Directors. On May 9, 2008, in connection with the first tranche of the financing discussed above, (i) $24,675 of the outstanding amount of Mr. Pagano’s promissory note was applied to the subscriptions made by Mr. Pagano and a trust for the benefit of his son; and (ii) $54,425, the entire outstanding amount of D.H. Blair Investment Banking Corp.’s promissory note, including principal and accrued interest, was applied to the subscriptions made by each of three affiliates of D.H. Blair Investment Banking Corp. On May 16, 2008, Mr. Pagano made a demand for repayment of the remaining outstanding principal and interest ($29,750) of his promissory note. On June 20, 2008, in connection with the second tranche of the financing discussed above (i) $30,000 of the outstanding principal amount of Mr. Rozzi’s promissory note was applied to the subscription made by Mr. Rozzi and he received a payment for $2,961 in accrued interest on July 10, 2008 and (ii) $53,740 of the outstanding amount of principal and accrued interest of Mr. Adler’s promissory note was applied to the subscription made by Mr. Adler and he received a payment for the remaining $1,195 in accrued interest. All of the promissory notes have been cancelled and there are no amounts outstanding to date.
We have been issued an opinion by our auditor that raises substantial doubt about our ability to continue as a going concern based on our current financial position. See note 2 of our financial statements.
Inflation
Periods of high inflation could have a material adverse impact on us to the extent that increased borrowing costs for floating rate debt (if any) may not be offset by increases in cash flow. At December 31, 2008, we had $0 in floating rate debt outstanding. There was no significant impact on our operations as a result of inflation during the years ended December 31, 2007 and 2008.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R replaces SFAS No. 141, “Business Combinations” (“SFAS 141”). SFAS 141R retains the fundamental requirements in SFAS 141 that the purchase method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R retains guidance of SFAS 141 for identifying and recognizing intangible assets separately from goodwill. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date with limited exceptions specified in the Statement. SFAS 141R also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R would have an impact on accounting for any business acquired after the effective date of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied. The Company is currently assessing the impact of SFAS 160 on its financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 gives financial statement users better information about the reporting entity’s hedges by requiring qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently assessing the impact of SFAS 161 on its financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect the adoption of this pronouncement to have a material impact on its financial position or results of operations.
In November 2008, the FASB ratified Emerging Issue Task Force Issue 08-6, “Equity Method Investment Accounting Considerations.” EITF 08-6 addresses certain issues that arise from a company’s application of the equity method under Opinion 18 due to a change in accounting for business combinations and consolidated subsidiaries resulting from the issuance of Statement 141(R) and Statement 160. EITF 08-6 addresses issues regarding the initial carrying value of an equity method investment, tests of impairment performed by the investor over an investee’s underlying assets, changes in ownership resulting from the issuances of shares by an investee, and changes in an investment from the equity method to the cost method. This Issue is effective and will be applied on a prospective basis in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years, consistent with the effective dates of Statement 141(R) and Statement 160.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in paragraphs 60 and 61 of SFAS No. 128. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In June 2008, the FASB issued EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock” (“EITF 07-5”). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument, or embedded feature, is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuations. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of EITF 07-5 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
ITEM 7A
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
ITEM
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SENTISEARCH, INC.
(A Development Stage Company)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
SentiSearch, Inc.
West Palm Beach, Florida
We have audited the accompanying balance sheets of SentiSearch, Inc. (A Development Stage Company) (the “Company”) as of December 31, 2008 and 2007, and the related statements of operations, stockholders’ equity (deficiency), and cash flows for the years then ended, and the cumulative period April 10, 2000 (commencement of business) to December 31, 2008. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SentiSearch, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended and the cumulative period April 10, 2000 (commencement of business) to December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company is in the development stage and has suffered recurring losses. This raises substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Raich Ende Malter & Co. LLP
Raich Ende Malter & Co. LLP
New York, New York
March 30,
SENTISEARCH, INC.
(A Development Stage Company)
Balance Sheets
SENTISEARCH, INC.
(A Development Stage Company)
Statements of Operations
See notes to financial statements.
SENTISEARCH, INC.
(A Development Stage Company)
Statements of Changes in Stockholders’ Equity (Deficiency)
See notes to financial statements.
SENTISEARCH, INC.
(A Development Stage Company)
Statements of Cash Flows
See notes to financial statements.
Notes to Financial Statements
1. Organization and Nature of Operations
SentiSearch, Inc. (“we,” “our”, “SentiSearch,” and “the Company”) was a wholly-owned subsidiary of Sentigen Holding Corp. (“Sentigen”) until the December 1, 2006 “spin-off”, discussed below. We are a development stage company and have a limited operating history. We were incorporated in the State of Delaware on October 3, 2006 to hold the olfaction intellectual property assets of Sentigen and its subsidiaries.
On October 10, 2006, in connection with its merger with Invitrogen Corporation, Sentigen separated its olfaction intellectual property assets from the businesses being acquired by Invitrogen Corporation. The distribution of SentiSearch shares to the shareholders of Sentigen, commonly referred to as a “spin-off,” took place immediately prior to the consummation of the merger. In connection with the distribution, on October 10, 2006, we entered into a distribution agreement with Sentigen, pursuant to which Sentigen contributed $250,000 to our capital. Also on October 10, 2006, we entered into a contribution agreement with Sentigen, pursuant to which Sentigen transferred to us all of its olfaction intellectual property. The olfaction intellectual property assets primarily consist of an exclusive license agreement with The Trustees of Columbia University in the City of New York (“Columbia”), dated April 10, 2000 (the “Columbia License”), and certain patent applications titled “Nucleic Acids and Proteins of Insect or 83b odorant receptor genes and uses thereof.”
During July 2007, we were issued two patents in the United States. During November 2007, we were issued one patent in Australia and during 2008, we were issued one patent in Mexico. Three of these patents were issued directly to us and the other patent was issued under the Columbia License. All of the issued patents cover nucleic acid molecules which encode insect odorant receptor proteins, including numerous variations on insect odorant receptor coding sequence. The patents cover any nucleic acid molecule as long as the protein it encodes contains a short segment of amino acids, linked together.
While we believe our technology capabilities in the olfaction area are substantial, up to this point, we have incurred substantial operating losses. There have been no revenues from operations to date. Although we have an exclusive license agreement with Columbia, only one patent has been issued under the Columbia License and we cannot provide any assurance that our additional patent applications will be successful. We intend to continually review the commercial validity of our olfaction technology in order to make the appropriate decisions as to the best way to allocate our limited resources.
2. Basis of Presentation
The financial statements for the period April 10, 2000 (Commencement of Business) to December 31, 2008 differ from the results of operations, financial condition and cash flows that would have been achieved had we been operated independently during the periods from April 10, 2000 through December 31, 2008. Our business was operated within Sentigen as part of its broader corporate organization rather than as a stand-alone company. Our historical financial statements do not reflect the expense of certain corporate functions that we would have needed to perform if we were not a wholly-owned subsidiary.
We are a development stage company as defined in Financial Accounting Standard Board (“FASB”) Statement No. 7, “Accounting and Reporting by Development Stage Enterprises.” Our planned principal operations have not yet commenced. We intend to establish a new business. We have not generated any revenues from operations and have no assurance of any future revenues. All losses accumulated since commencement of our business have been considered as part of our development stage activities.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. The Company has had no revenue and has incurred accumulated net losses during the development stage of $1,790,406. The Company may need substantial amounts of additional financing to commercialize the research programs undertaken, for which financing may not be available on favorable terms, or at all. The Company’s ability to obtain financing and realize revenue depends upon the status of future business prospects, as well as conditions prevailing in the capital markets. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon management’s plan to raise additional capital from the sale of stock and, ultimately, income from operations. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to recover the value of its assets or satisfy its liabilities.
3. Summary of Significant Accounting Policies
a.
Cash and Cash Equivalents - Cash and cash equivalents include liquid investments with maturities of three months or less at the time of purchase.
b.
Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company maintains its cash accounts at high quality financial institutions with balances, at times, in excess of federally insured limits. As of December 31, 2008, the Company had no cash balances in excess of federally insured limits. Management believes that the financial institutions that hold the Company’s deposits are financially sound and therefore pose minimal credit risk. In October 2008, Congress temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009.
c.
License and Patent Costs - The costs of intangible assets that are purchased from others for use in research and development activities and that have alternative future uses (in research and development projects or otherwise) are accounted for in accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The amortization of those intangible assets used in research and development activities is a research and development cost. However, the costs of intangibles that are purchased from others for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred. We determined that the licensing costs arising from our exclusive licensing agreement with The Trustees of Columbia University have alternative future uses. These costs have been capitalized and are being amortized on a straight-line basis through April 2010 (see Note 6).
d.
Impairment - Intangible and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. A review for impairment includes comparing the carrying value of an asset to an estimate of the undiscounted net future cash inflows over the life of the asset or fair market value. An asset is considered to be impaired when the carrying value exceeds the calculation of the undiscounted net future cash inflows or fair market value. An impairment loss is defined as the amount of the excess of the carrying value over the fair market value of the asset. We believe that none of our intangible and long-lived assets are impaired as of December 31, 2008 (see Note 6).
e.
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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
f.
Income Taxes - Certain income and expense items are accounted for differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax basis of assets and liabilities and the tax effect of net operating loss and tax credit carry-forwards applying the enacted statutory tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established if it is determined to be more likely than not that deferred tax assets will not be recovered. The Company recognized interest and penalties, if any, related to uncertain tax positions as income tax expense.
g.
Loss Per Share - The accompanying financial statements include loss per share calculated as required by FASB Statement No. 128 “Earnings Per Share” on a “pro-forma” basis as if we were a separate entity from the period April 10, 2000 (commencement of business) until October 3, 2006 (our date of incorporation). Basic loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding. Diluted loss per share include the effects of securities convertible into common stock, consisting of stock options, to the extent such conversion would be dilutive. FASB Statement No. 128 prohibits adjusting the denominator of diluted Earnings Per Share for additional potential common shares when a net loss from continuing operations is reported. The assumed exercise of common stock equivalents was not utilized for the twelve months ended December 31, 2008 since the effect would be anti-dilutive. As of December 31, 2008, 575,000 options were outstanding of which 458,334 were exercisable.
h.
Fair Value of Financial Instruments - The carrying value of cash and cash equivalents and accounts payable and accrued expenses approximates fair value because of the short-term maturity of those instruments. The carrying amount of the Company’s notes payable approximate fair value because the effective yield of such instruments, which includes the effects of contractual interest rates taken together with any discounts, is consistent with current market rates of interest for instruments of comparable credit risk.
On January 1, 2008, the Company adopted Financial Accounting Standards Board (“FASB”) SFAS No. 157, “Fair Value Measurements” (“SFAS 157. There was no impact on the Company’s financial position, results of operation or cash flows as of December 31, 2008 and for the year then ended as a result of FAS 157.
On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). There was no impact on the Company’s financial position, results of operation or cash flows as of December 31, 2008 and for the year then ended as a result of FAS 159.
i.
Stock-Based Compensation- Stock-based compensation expense represents share-based payment awards granted subsequent to December 31, 2005, based upon the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the award. Stock-based compensation expense is recognized based upon awards ultimately expected to vest, reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The expected term of stock options represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by SAB 107 for “plain vanilla” options. The Company used this approach as it did not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The expected stock price volatility for the Company’s stock options was determined by examining the historical volatilities for industry peers for periods that meet or exceed the expected term of the options, using an average of the historical volatilities of the Company’s industry peers as the Company did not have sufficient trading history for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumption as more historical data for the Company’s common stock becomes available. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.
The Company accounts for its issuances of stock-based compensation to non-employees for services using the measurement date guidelines enumerated in SFAS 123R and EITF 96-18. Accordingly, the value of any awards that were vested and non forfeitable at their date of issuance were measured based on the fair value of the equity instruments at the date of issuance. The non-vested portion of awards that are subject to the future performance of the counterparty are adjusted at each reporting date to their fair values based upon the then current market value of the Company’s stock and other assumptions that management believes are reasonable. The Company believes that the fair value of the stock options issued to non-employees is more reliably measurable than the fair value of the services rendered. The fair value of the stock options granted was calculated using the Black-Scholes option pricing model as prescribed by SFAS 123R.
4. Notes Payable
On June 21, 2007, we entered into demand promissory notes with four of the company’s stockholders including our Chief Executive Officer and a member of the Board of Directors (together, the “Lenders”), providing for loans to us in the aggregate amount of $180,000. The promissory notes accrued interest at Citibank N.A’s reported prime rate plus 3%, which was due and payable at the time the principal amount of each respective promissory note became due. Although the promissory notes had a maturity date of June 22, 2009, each Lender had the right to demand the payment of all of the outstanding principal and interest of his or its respective promissory note at any time prior to the maturity date. At the time of the loan transaction, each of the Lenders was a beneficial owner of 5% or more of our common stock.
In May and June 2008, the promissory notes were converted into subscriptions agreements in two phases (see note 5). The accrued interest expense related to the promissory notes amounted to $16,921, of which $8,756 was paid in cash and $8,165 was converted into the subscriptions.
5. Stockholders’ Equity
Common Stock
During the second quarter of 2008, the Company closed on a financing in two tranches resulting in the issuance of common stock for $927,700, net of offering costs of $22,300. On May 9, 2008, the Company closed on the first tranche of the financing, for an aggregate amount of $750,000, which consisted of cash in the amount of $563,986 and the conversion of $186,014 of indebtedness. Participants in the first tranche of the financing subscribed for an aggregate of 3,947,363 shares of common stock, based on the price of $0.19 per share. On June 20, 2008, we had an initial closing of $145,980 of the second tranche of the financing, consisting of cash in the amount of $62,240 and the conversion of $83,740 of indebtedness. Participants in the initial closing of the second tranche of the financing subscribed for an aggregate of 768,315 shares of common stock, based on the price of $0.19 per share.
On July 9, 2008, the Company raised $54,020 of additional funds from the unsubscribed portion of the second tranche of the financing from the investors who participated and desired to exercise their over-allotment option in the June 20, 2008 closing. The Company issued an aggregate of 337,424 shares of its common stock in connection with the over-allotment exercise, based on the price of $0.16 per share.
Prior to the issuance of any shares of common stock pursuant to the financing, the Company was required to receive the approval of its stockholders to amend our Certificate of Incorporation to increase the number of authorized shares of common stock to permit the financing shares to be issued (“Stockholder Approval”). The Company received Stockholder Approval at its annual meeting of stockholders on June 24, 2008.
Participants in the financings included ten of our largest stockholders (each holding 50,000 or more shares of our common stock), including, the Company’s Chairman and Chief Executive Officer, a director, and certain holders of 5% or more of the Company’s common stock. All ten stockholders participated in the first tranche of the financing, and six stockholders (including a director) participated in the second tranche of the financing.
6. Exclusive License Agreement
On April 10, 2000, Sentigen Biosciences, Inc. (“Sentigen Biosciences”), a wholly-owned subsidiary of Sentigen, entered into the Columbia License.
In consideration of the Columbia License, Columbia was issued 75,000 shares of Sentigen common stock and will receive royalties of 1% of the net sales of any licensed products or services. The Columbia License had certain minimum funding requirements, all of which have been satisfied.
On October 10, 2006, we entered into a contribution agreement with Sentigen pursuant to which Sentigen transferred to us all of its olfaction intellectual property, including the Columbia License. On October 17, 2006, Columbia consented to the assignment of the Columbia License from Sentigen Biosciences to SentiSearch subject to certain conditions, all of which have already been satisfied to the extent currently required.
The value of the Columbia License is recorded as license costs, net of accumulated amortization on the accompanying balance sheet. The original value of the license costs reflects the closing share price of Sentigen’s common stock on April 10, 2000. The value of the license costs, net of amortization as of December 31, 2008 was $43,636.
Intangible and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. A review of our olfaction technology was performed by Charter Capital Advisers, Inc. in August 2006 which concluded that the estimated range of fair value was $120,000 to $190,000. An impairment loss of $122,996 was recognized as amortization expense in August 2006 as the amount of the excess of the carrying value over the fair market value of the asset.
The license costs are being amortized on a straight line basis through April 2010. The following table details the expected amortization costs of the license over the next two years:
7. Patent Costs
During July 2007, we were issued two patents in the United States. During November 2007, we were issued a patent in Australia and during 2008, we were issued a patent in Mexico. One of the U.S. patents, the Australia and Mexico patents were issued directly to us and the other U.S. patent was issued under the Columbia License. All of the issued patents cover nucleic acid molecules which encode insect odorant receptor proteins, including numerous variations on insect odorant receptor coding sequence. The patents cover any nucleic acid molecule as long as the protein it encodes contains a short segment of amino acids, linked together.
The value of the patent costs, mainly consisting of legal and application fees in the amount of $75,097, is recorded as patent costs, net of accumulated amortization on the accompanying balance sheet. The value of the patent costs, net of amortization as of December 31, 2008 was $46,019.
The patent costs are being amortized on a straight line basis through April 2010, the remaining term of the license costs. The following table details the expected amortization costs of the patent:
8. Share-Based Payments
On May 16, 2007, the Company granted options to purchase 50,000 shares of its common stock at an exercise price of $0.18 per share to a director. The fair value of the underlying common stock at the date of grant was $0.18 per share. The options vested immediately and have a five year term. Assumptions related to the estimated fair value of these stock options on their date of grant, which the Company estimated using the Black-Scholes option pricing model, are as follows: risk-free interest rate of approximately 5%; expected divided yield of zero percent; expected option life of two and one-half years; and expected volatility of approximately 17%. The aggregate grant date fair value of the award amounted to $1,490.
On March 27, 2008 and May 14, 2008, the Company granted options to purchase an aggregate of 425,000 and 100,000 shares, respectively, of its common stock to three individuals for consulting services rendered to the Company and a director, respectively, each at an exercise price of $0.19 per share and term of ten years. The terms of the consulting arrangements are for five years. The fair value of the underlying common stock at the date of grant was $0.07 per share. The options granted on March 27, 2008, vest as follows: 158,334 immediately, 133,333 on the first anniversary and 133,333 on the second anniversary. The options granted on May 14, 2008 vested upon stockholder approval to amend the Certificate of Incorporation to increase the number of authorized shares of common stock at the annual stockholder meeting on June 24, 2008, and have a term of ten years unless cancelled earlier upon director's removal or resignation from the board. Assumptions related to the estimated fair value of these stock options on their date of grant, which the Company estimated using the Black-Scholes option pricing model, are as follows: risk-free interest rate of approximately 4%; expected dividend yield of zero percent; expected option life of ten years; and expected volatility of approximately 17%. The aggregate grant date fair value of the award amounted to $36,698.
The Company recorded $28,542 and $1,490 of compensation expense for the year ended December 31, 2008 and 2007, respectively, related to these options.
The stock-based compensation expense will fluctuate as the fair market value of the common stock fluctuates. The weighted-average grant date fair value of options granted during the year ended December 31, 2008 amounted to $0.07 per share. Total unamortized compensation expense related to unvested stock options at December 31, 2008 amounted to $4,480 and is expected to be recognized over a weighted average period of approximately six months.
The following table summarizes information on all common stock purchase options issued by us for the years ended December 31, 2008 and 2007:
The number and weighted average exercise prices of all common stock purchase options as of December 31, 2008 are as follows:
All options were issued at an option price equal to the market price on the date of the grant. In addition, none of the options currently outstanding have any intrinsic value.
The Company issues new shares of common stock upon exercise of stock options.
9. Income Taxes
SentiSearch was a member of the Sentigen consolidated group for federal income tax purposes for the period October 3, 2006 through December 1, 2006. Prior to October 3, 2006, the assets and the related business of SentiSearch were owned and operated by Sentigen. Such business was the predecessor of SentiSearch, which became a separate legal entity on October 3, 2006. As such, any deductions generated by the Company’s assets prior to October 3, 2006 were utilized by, or remain with, the consolidated group, Sentigen. The Company was allocated its share of the consolidated group’s net operating loss for the period October 3, 2006 through December 1, 2006. The table below reflects the deferred tax assets from net operating loss carryforwards “as if” the Company was a stand alone legal entity from the period April 10, 2000 through October 2, 2006.
On January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). There was no impact on the Company’s consolidated financial position, results of operations or cash flows at December 31, 2007 and for the year then ended as a result of implementing FIN 48. At the adoption date of January 1, 2007 and at December 31, 2007, the Company did not have any unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007 and December 31, 2007, the Company had no accrued interest or penalties. The Company currently has no federal or state tax examinations in progress nor has it had any federal or state tax examinations since its inception. All of the Company’s tax years are subject to federal and state tax examination.
Deferred taxes reflect the tax effects of temporary differences between the amounts of assets and liabilities for financial reporting and the amounts recognized for income tax purposes as well as the tax effects of net operating loss carryforwards. The significant components of net deferred tax assets are as follows:
We believe that it is more likely than not that the deferred tax assets will not be realized and have therefore provided a valuation allowance in the accompanying balance sheet equal to the entire amount of the deferred tax assets. The provision for income taxes on continuing operations differs from the amount using the statutory federal income tax rate (34%) as follows:
At December 31, 2008, the Company has federal and state net operating loss carryforwards of approximately $937,000 for each tax jurisdiction, available to offset future federal and state taxable income. These carryforwards will expire on December 31, 2028. In addition, the Company has a deferred tax asset of approximately $93,000 related to a basis difference in its intangible asset, and stock based compensation which is also available to offset future federal and state taxable income. There are no tax-related balances due to or from any entities of which the Company was previously affiliated.
10. Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R, “Business Combination” (“SFAS 141R”), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring goodwill acquired in a business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption of SFAS 141R will have a material impact on our financial conditions or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS 160”) which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect the adoption of SFAS 160 will have a material impact on our financial conditions or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 gives financial statement users better information about the reporting entity’s hedges by providing for qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those years. We do not expect the adoption of SFAS 161 will have a material impact on our financial condition or results of operations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect the adoption of this pronouncement to have a material impact on its financial position or results of operation.
In November 2008, the FASB ratified Emerging Issue Task Force Issue 08-6, “Equity Method Investment Accounting Considerations.” EITF 08-6 addresses certain issues that arise from a company’s application of the equity method under Opinion 18 due to a change in accounting for business combinations and consolidated subsidiaries resulting from the issuance of Statement 141(R) and Statement 160. EITF 08-6 addresses issues regarding the initial carrying value of an equity method investment, tests of impairment performed by the investor over an investee’s underlying assets, changes in ownership resulting from the issuances of shares by an investee, and changes in an investment from the equity method to the cost method. This Issue is effective and will be applied on a prospective basis in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years, consistent with the effective dates of Statement 141(R) and Statement 160.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in paragraphs 60 and 61 of SFAS No. 128. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In June 2008, the FASB issued EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock” (“EITF 07-5”). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument, or embedded feature, is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuations. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of EITF 07-5 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
11. Commitments and Contingencies
As of June 25, 2008, the Company has entered into a sublease for office space in West Palm Beach, Florida. The lease has a term of one year, with an option to renew for an additional year. The lease requires twelve monthly payments of approximately $1,390 through June 2009.
12. Related Party Transactions
During the year ended December 31, 2008, the Company’s Chief Executive Officer and Chairman made interest-free demand loans to the Company in the aggregate of $106,914. The loans were pursuant to a Revolving Credit Note dated as of March 10, 2008, which would have matured on March 10, 2009. The total aggregate amount of $106,914 outstanding under the Revolving Credit Note on May 9, 2008, was applied to Mr. Pagano’s participation in the Company’s financing that closed on May 9, 2008 (see note 5).
Please refer to Note 4 regarding additional related party transactions.
ITEM
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A
ITEM 9A
CONTROLS AND PROCEDURES.
Controls and Procedures
As of December 31, 2008, Mr. Joseph K. Pagano, who as our Chief Executive Officer, Secretary and Treasurer is our principal executive and principal financial officer, evaluated the effectiveness of our "disclosure controls and procedures" as defined in Rules 13a-15(e) and Rule 15d-15(e)of the Exchange Act ("Disclosure Controls"). Based upon this evaluation, Mr. Pagano concluded that the Disclosure Controls were effective, as of the date of their evaluation, in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that any information relating to us that is required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive/financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
During the fiscal quarter ended December 31, 2008, there were no changes in our "internal control over financial reporting" as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act (“Internal Control”), that have materially affected or are reasonably likely to materially affect our Internal Control.
Management’s Annual Report on Internal Control Over Financial Reporting
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control over Financial Reporting - Guidance for Smaller Public Companies.
We are a development stage organization, with our chief executive officer having control over all of the detail accounting transactions and the day-to-day activities. Although this control rests with the chief executive officer, care was taken to select and employ key controls which are sensitive to the segregation of duties issue. Based on our assessment of those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2008.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report on Form 10-K.
ITEM 9B