NightFood Holdings, Inc. - Quarter Report: 2019 March (Form 10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended: March 31, 2019

Or

☐ 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: 000-55406

Nightfood Holdings, Inc.

(Exact name of registrant as specified in its charter)

888-888-6444

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes ☒   No ☐

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 ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ☐   No ☒

Securities registered pursuant to Section 12(b) of the Act:

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. At May 14, 2019, the registrant had outstanding 52,997,543 shares of common stock. 

Table of Contents

NightFood Holdings, Inc.

Financial Statements

For the nine months ended March 31, 2019 and March 31, 2018

Item 1. Financial Statements

NightFood Holdings, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

NightFood Holdings, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

NightFood Holdings, Inc.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

NightFood Holdings, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

NightFood Holdings, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENT INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts, and use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,” “should,” “plan,” “project,” “will” and other words of similar meaning. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions, technological developments related to business support services and outsourced business processes, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.

Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be achieved. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth under the headings “Business” and “Risk Factors” within our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, as well as the other information set forth herein.

OVERVIEW

NightFood Holdings runs two distinct operating companies, each serving a different market segment with different products.

MJ Munchies, Inc. is a Nevada corporation formed in January of 2018 to exploit legally compliant opportunities in the CBD and marijuana edibles and related spaces. The Company intends to market some of these new products under the brand name “Half-Baked”. To date, this subsidiary and its operations have had a nominal impact on the financial statements contained herein.

Since inception, MJ Munchies has applied for U.S. Trademark protection for its brand of Half-Baked snacks, currently under development. The Company also applied for, and was granted, trademark protection in the state of California for the name Half-Baked for snacks containing THC. In addition, The Company acquired HalfBaked.com, and has secured other intellectual property in its portfolio, including a US Patent Application related to a proprietary ingredient it has developed for use in THC-infused edibles.

NightFood, Inc. is a snack company focused on manufacturing and distribution of Nightfood nighttime ice cream. The Nightfood ice cream national rollout began in the early part of calendar 2019. The Company secured distribution in multiple regional supermarket chains within four months of manufacturing its first pint.

On February 7, 2019, it was announced that the Nightfood ice cream line was voted best new ice cream of 2019 in a survey of over 40,000 consumers. Global market research giant Kantar conducted the survey, and the result was that Nightfood won the prestigious Product of the Year award. As announced in a recent news release, the benefits of this award include millions of dollars in publicity through national and regional media outlets, enhanced consumer perception, and stronger consumer trial at retail.

Management is confident consumer demand exists for better nighttime snacking options, and that they are pioneering a new consumer category consisting of nighttime specific snacks. This confidence is supported by research from major consumer goods research firms such as IRI Worldwide, and Mintel, who identified nighttime specific foods and beverages as one of the “most compelling and category changing trends” for 2017 and beyond.

It is estimated that over $50 billion is spent annually in the United States on snacks that are consumed between dinner and bed. Company management believes that a significant percentage of that consumer spend will move from conventional snacks to nighttime specific snacks in coming years.

The Nightfood Scientific Advisory Board is made up of leading sleep and nutrition experts, who help Nightfood deliver on its brand promise. The first member of this advisory board was Dr. Michael Grandner, Director of the Sleep and Health Research Program at the University of Arizona. Dr. Grandner has been conducting research on the link between nutrition and sleep for over ten years, and he believes improved nighttime nutritional choices can improve sleep, resulting in many short and long-term health benefits. In March of 2018, the Company added Dr. Michael Breus to their Scientific Advisory Board. Breus, known to millions as The Sleep Doctor™, is believed to be the Nation’s most trusted authority on sleep. He regularly appears in the national media to educate and inform consumers so they can sleep better and lead happier, healthier, more productive lives. In July, 2018, we completed our Scientific Advisory Board with the addition of Lauren Broch, Ph.D, M.S. Dr. Broch is a sleep therapist and former Director of Education & Training at the Sleep-Wake Disorders Center at Weill Cornell Medical College. Dr. Broch also has a master’s degree in human nutrition. This unique combination allowed her to play an important role in the reformulation of our nutrition bars, and the development of Nightfood ice cream. These experts work with Company management to ensure Nightfood products deliver on their nighttime-appropriate, and sleep-friendly promises.

DEVELOPMENT PLANS

Eight flavors of Nightfood ice cream are currently available at retail. The research & development team has already begun working with the on additional flavors of ice cream and dairy-free options. These new products are expected to be available for sampling and presentation, along with all existing flavors, when most of the major supermarket chains hold their ice cream review period in September and October of this year.

In addition to the stated goal of securing distribution in 10,000 retail outlets by March 31, 2020, Nightfood recently entered into a partnership with goPuff, the world’s first digital convenience retailer. This partnership allows for Nightfood to market its ice cream directly to high-volume consumers who can then place an order through the goPuff website or app, and have their Nightfood delivered in under 30 minutes. Nightfood ice cream is currently available in goPuff markets such as Boston, Washington DC, Philadelphia, Baltimore, Chicago, and many others. Over the next several months, the joint roll-out plan would have Nightfood in additional markets such as Denver, Atlanta, Phoenix, Seattle, Portland, Austin, Houston, Dallas, Tampa, and many others.

Management believes this relationship will allow the brand to rapidly and efficiently scale consumer ad spend, which will directly drive revenue growth and facilitate additional traditional distribution opportunities with the largest retail chains in the nation.

MJ Munchies recently signed a Letter of Intent to enter into a licensing agreement with Global Consortium, Inc., a company currently in the business of manufacturing and distributing marijuana-infused edible products. Under this proposed agreement, Global Consortium would be granted the rights to manufacture and distribute products under Munchies’ Half-Baked™ mark. Global Consortium reported over $600,000 in sales in the quarter ending September 30, 2018 and reported selling over $2,000,000 in CBD products for 2018.  Subsidiary Infused Edibles has what is believed to be the broadest selection of infused product SKUs.  As of the date of this filing, the two Parties are working together to finalize and execute the licensing agreement.

INFLATION

Inflation can be expected to have an impact on our operating costs. A prolonged period of inflation could cause a general economic downturn and negatively impact our results. However, the effect of inflation has been minimal over the past three years.

SEASONALITY

Because management expects rapid growth in terms of both distribution and sales velocity in the coming months and years, we do not believe that our business will be seasonal to any material degree until full national penetration has been established.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIOD ENDED

March 31, 2019 and March 31, 2018.

Certain income statement expenses discussed below, such as interest expense and change in derivative liability, are “non-cash expenses” that are exacerbated by the significant increase in the price of our common stock during the reporting quarter. Had our stock price remained flat or decreased during the quarter, with no changes to our operations, our revenues or other expenses, these financing-related expenses could have been closer to zero, or even have an income related P&L effect. As such, aspects of the losses discussed below do not directly reflect on the day-to-day operations of our business, and should not be viewed as an indication of what future income statements might look like as we scale our operations. We are confident operational profitability is attainable during the next few quarters through our operations prior to such adjustments.

For the three months ended March 31, 2019 and March 31, 2018 we had revenues of $159,575 and $27,732 respectively and incurred an operating loss of $294,174 and $654,485 respectively. The revenue increase is the result of sales of newly launched Nightfood ice cream to four distributors and our e-commerce partner. A result of this increase in sales is an increase in cost of goods sold from $16,378 for the three months ending March 31, 2018 to $74,443 for the three months ending March 31, 2019. Our income statement shows an increase in “Advertising and Promotional” from $30,459 for the three months ending March 31, 2018 to $105,277 for the three months ending March 31, 2019. It’s important to note that $72,000 of the $105,277 was for public relations and not what most would likely consider “advertising”. Paid advertising actually decreased from $19,742 for the quarter ending March 31, 2018 to $16,675 for the quarter ending March 31, 2019. Selling, general, and administrative expenses increased slightly from $125,561 for the three months ending March 31, 2018 to $127,775 for the three months ending March 31, 2019. This category includes expenses such as website design, freight, warehousing, shipping, public relations, product liability insurance, and research & development of new products.

For the nine months ended March 31, 2019 and March 31, 2018 we had revenues of $296,434 and $136,458 respectively and incurred an operating loss of $1,000,549 and $1,522,326 respectively. The majority of the revenue increase is the result of sales of newly launched Nightfood ice cream to four distributors and our e-commerce partner. A result of this increase in sales is an increase in cost of goods sold from $101,807 for the nine months ending March 31, 2018 to $129,634 for the nine months ending March 31, 2019.

Professional fees decreased from $509,819 for the three months ending March 31, 2018 to $146,254 for the three months ending March 31, 2019. For the three months ended March 31, 2019 compared to the three months ended March 31, 2018, we also experienced changes in derivative liabilities from ($63,210) to $1,377,160 and interest expense from $346,390 to $539,352. For the three months ended March 31, 2019, the Company recorded other expenses of $0 compared to $416,608 for the three months ended March 31, 2018. This decrease is attributable to the fact that there was no need to restructure or consolidate debt in the current quarter. As a direct result of the prior successful consolidation, Management has been able to secure ongoing operating capital to launch new initiatives such as the Half-Baked line of cannabis edibles, and Nightfood ice cream, while minimizing dilution associated with the use of convertible notes from multiple lenders. Although no assurances can be given, management believes that the positive results of these efforts will lead to more efficient sources of capital, and allow the Company to grow operations and revenues in a meaningful way, ultimately increasing shareholder value.

“Advertising and Promotional” increased from $132,831 for the nine months ending March 31, 2018 to $285,700, with much of this increase accounted for by expenses related to the design and production set up costs for the new ice cream packaging, and public relations. Selling, general, and administrative expenses decreased from $441,545 for the nine months ending March 31, 2018 to $432,095 for the nine months ending March 31, 2019. Again, this category includes expenses such as website design, freight, warehousing, shipping, public relations, product liability insurance, and research & development of new products.

Professional fees decreased from $982,601 for the nine months ending March 31, 2018 to $449,554 for the nine months ending March 31, 2019. For the nine months ended March 31, 2019 compared to the nine months ended March 31, 2018, we also experienced changes in derivative liabilities from $187,255 to $596,033 and interest expense from $790,831 to $1,495,485. For the nine months ended March 31, 2019, the Company recorded other expenses of $779 compared to $1,068,386 for the nine months ended March 31, 2018. This decrease is attributable to the fact that there was no need to restructure or consolidate debt in the current fiscal year. As a direct result of the prior successful consolidation, Management has been able to secure ongoing operating capital to launch new initiatives such as the Half-Baked line of cannabis edibles, and Nightfood ice cream, while minimizing dilution associated with the use of convertible notes from multiple lenders. Although no assurances can be given, management believes that the positive results of these efforts will lead to more efficient sources of capital, and allow the Company to grow operations and revenues in a meaningful way, ultimately increasing shareholder value. 

Customers

For the three and nine month periods ending March 31, 2019, the majority of revenues resulted from wholesale sales of NightFood ice cream to wholesale distributors. As the Company has largely shifted away from direct-to-consumer e-commerce, and towards a wholesale approach for the national ice cream rollout, it is expected that future revenues will be more concentrated than in the past when the majority of revenue was from direct to consumer sales.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2019, we had cash on hand of $37,446, receivables of $85,604 and inventory value of $314,966.

The Company has limited available cash resources and we do not believe our cash on hand will be adequate to satisfy our ongoing working capital needs. The Company is continuing to raise capital through private placement of our common stock and through the use of convertible notes to finance the Company’s operations, of which it can give no assurance of success. However, the Company has a strong ongoing relationship with Eagle Equities and we expect Eagle to continue to fund our projected growth over the next several quarters at terms that have become more favorable to the Company due to certain milestones management has achieved. We believe that our current capitalization structure, combined with ongoing increases in revenues, will enable us to achieve successful financings to continue our growth. In the short term, the Company plans to continue to take advantage of convertible notes as a financing vehicle, as it allows for today’s operating capital to be either repaid, or converted to equity at future valuations, which management views as beneficial to shareholders.

With the recent excitement surrounding the national launch of Nightfood ice cream, Management continues to field overtures from more traditional equity capital sources. However, Management does not believe accepting equity capital at current valuations is in the best interest of shareholders, in light of the rapid growth in distribution and revenue that are expected in the coming months. Management has made suitors aware that it does intend to accept equity funding at acceptable valuations at some future point, and will use that capital to clear debt from the balance sheet, and fund ongoing expansion and growth.

Because the business is new and has limited operating history and relatively few sales, no certainty of continuation can be stated. Management has devoted a significant amount of time in the raising of capital from additional debt and equity financing. However, the Company’s ability to continue as a going concern is dependent upon raising additional funds through debt and equity financing and generating revenue. There are no assurances the Company will receive the necessary funding or generate revenue necessary to fund operations.

Even if the Company is successful in raising additional funds, the Company cannot give any assurance that it will, in the future, be able to achieve a level of profitability from the sale of its products to sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on recoverability and reclassification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Since our inception, we have sustained operating losses. During the three months ended March 31, 2019, we incurred a net loss of $2,210,586 compared to $1,359,802 for the three months ended March 31, 2018. Much of this loss is largely a function of the way certain financing activities are recorded, and does not represent actual operating losses.

During the nine months ended March 31, 2019, net cash used in operating activities was $1,051,922 compared to $1,437,247 for the nine months ended March 31, 2018. The majority of what shows as “net cash used in operating activities” is related to non-cash items associated with to the ongoing capitalization of the Company during the reporting period.

During the nine months ended March 31, 2019, net cash aggregating $1,040,928 was provided by financing activities, compared to $1,431,219 for the nine months ended March 31, 2018.

From our inception in January 2010 through March 31, 2019, we have generated an accumulated deficit of approximately $11,803,311, compared to $8,620,714 from inception through June 30, 2018. Assuming we raise additional funds and continue operations, we expect to incur additional operating losses during the next one to two quarters and possibly thereafter. We plan to continue to pay or satisfy existing obligation and commitments and finance our operations, as we have in the past, primarily through the sale of our securities and other forms of external financing until such time that we are able to generate sufficient funds from the sale of our products to finance our operations, of which we can give no assurance.

On November 25, 2016, the company entered into a material definitive agreement. On that date, the company executed and delivered a Plan of Reorganization Including Option to Acquire (the “Plan”) by and among the Registrant, Hook Group, LLC (“Hook”) and Suffield Foods. LLC (“Suffield”). The Plan contemplates the Registrant acquiring an equity interest in and potentially merging Hook and its subsidiary Suffield with and into a wholly owned subsidiary of the Registrant. As of the date of this filing, the agreement has been formally terminated by the Registrant. 

As of February 8, 2017, we entered into two agreements with Black Forest, an Equity Purchase Agreement (the “EPA”) and a Registration Rights Agreement (the “RRA”). The two agreements were filed as exhibits to the Registrant’s Current Report on Form 8-K dated February 8, 2017, and this Registration Statement was filed in order for us to fulfill our obligations under the RRA. The following summary is qualified in its entirety by reference to such exhibits to our Form 8-K. On August 24, 2017, the Company issued its first and, to date, only “put notice” to Black Forest and delivered Black Forest 264,085 shares of common stock in exchange for $30,000.

We intend to rely on the sale of stock in private placements, and the issuance of new debt, to fund our operations. If we are unable to raise cash through the sale of our stock, we may be required to severely restrict our operations. The Company has received several tranches of capital from a friendly institutional investor, who has been our primary source of capital for the last 20 months. We expect this investor to continue to fund ongoing operations, as well as the development and launch of new products and intellectual property for Nightfood and MJ Munchies.

Effective May 6, 2015, the Company entered into a consulting agreement with Sean Folkson. The agreement was retroactive to January 1st, 2015. In exchange for services provided to the Company by Folkson, the Company agreed to pay Folkson $6,000 monthly. This compensation expense started accruing on January 1, 2015. On June 6, 2018, The Company and Folkson agreed to an extension of the agreement, which would run from July 1, 2018 through June 30, 2019. The monthly compensation remained at $6,000 in monthly consulting fees. This new Agreement also contained additional compensation in the form of bonuses which will be earned by Folkson when the Company reports its first quarter with revenues in excess of $1,000,000. Folkson will earn an additional bonus when the Company reports its first quarter with revenues in excess of $3,000,000. Upon the filing of the first quarter with revenues in excess of $1,000,000, Folkson shall earn 1,000,000 warrants with a strike price of $.50. Upon the filing of the first quarter with revenues in excess of $3,000,000, Folkson shall earn 3,000,000 warrants with a strike price of $.50.

On October 12, 2018, Folkson opted to purchase 400,000 shares of common stock at $.30 per share, by exercising warrants. To make this purchase, Folkson used $120,000 in accrued NightFood consulting fees.

On February 4, 2019, the Company entered into a “Lock-Up” Agreement with Folkson whereby Folkson has agreed to not transfer, sell, or otherwise dispose of any shares of his NGTF stock during the next twelve months.

As part of this agreement, Folkson received warrants to acquire 400,000 shares of NGTF common stock at an exercise price of $.30 per share. All warrants carry a twelve month term and a cashless provision, and will expire if not exercised within the twelve month term. Folkson may not transfer, sell, or otherwise dispose of these warrants at any time, as there are no transfer rights provided for in the Agreement.

On February 6, 2019, the Registrant entered into a “Leak-Out” Agreement with Peter Leighton, former affiliate and owner of 4,000,000 shares, which will restrict Leighton’s ability to sell, transfer, or otherwise dispose of his shares above a certain, mutually agreed-upon monthly threshold.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these unaudited condensed consolidated 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 liabilities. On an on-going basis, we evaluate past judgments and our estimates, including those related to allowance for doubtful, allowance for inventory write-downs and write offs, deferred income taxes, provision for contractual obligations and our ability to continue as a going concern. We base our estimates on historical experience and on various other assumptions that we believe 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 apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Note 2 to the consolidated financial statements, presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. There were no significant changes in our critical accounting estimates during the nine months ended March 31, 2019.

OFF BALANCE SHEET ARRANGEMENTS

None.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

No report required.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures.

We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2019. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report because we did not document our Sarbanes-Oxley Act Section 404 internal controls and procedures.

As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures such as implementing and documenting our internal controls procedures.

Changes in internal controls over financial reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The Company’s management, including its Principal Executive Officer and its Principal Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, 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, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. 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. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are not engaged in any litigation at the present time, and management is unaware of any claims or complaints that could result in future litigation. Management will seek to minimize disputes with its customers but recognizes the inevitability of legal action in today’s business environment as an unfortunate price of conducting business.

ITEM 1A. RISK FACTORS.

Not required for smaller reporting companies.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

9