UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015MARCH 31, 2016

OR

 

FOR THE TRANSITION PERIOD FROM __________ TO _________

COMMISSION FILE NUMBER: 000-25132

(Exact name of registrant as specified in its charter)

c/o Mymetics S.A.

Biopole

Route de la Corniche, 4

1066 Epalinges (Switzerland)

 

(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 011 41 21 653 4535

             

 

MYMETICS CORPORATION

CONSOLIDATED BALANCE SHEETS

 (UNAUDITED)

(In Thousands of Euros)

 

MYMETICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 (UNAUDITED)

(In Thousands of Euros, Except Per Share Data)

MYMETICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands of Euros)

MYMETICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. The Company and Summary of Significant Accounting Policies

BASIS OF PRESENTATION

The amounts in the notes are shown in thousands of EURO rounded to the nearest thousand except for share and per share amounts.

The accompanying interim period consolidated financial statements of Mymetics Corporation (the "Company" or “Mymetics”) set forth herein have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such SEC rules and regulations. The interim period consolidated financial statements should be read together with the audited financial statements and the accompanying notes included in the Company's latest annual report on Form 10-K for the fiscal year ended December 31, 2014.2015.

The accompanying financial statements of the Company are unaudited. However, in the opinion of the Company, the unaudited consolidated financial statements contained herein contain all adjustments necessary to present a fair statement of the results of the interim periods presented. All adjustments made during the three-month period ending September 30, 2015March 31, 2016 were of a normal and recurring nature.

As of September 30, 2015,March 31, 2016, the Company is in the pre-clinical testing of some of its vaccine candidates and a commercially viable product is not expected for several more years. However, the Company generates some revenue through the licensing of its RSV vaccine and from collaboration and grant agreements for R&D services and some grant revenue.services. Management believes that the Company’s research and development activities will result in valuable intellectual property that can generate significant revenues in the future such as by licensing. Vaccines are one of the fastest growing markets in the pharmaceutical industry.

These consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced significant losses since inception resulting in an accumulated deficit of E69,727E71,020 at September 30, 2015.March 31, 2016. Further, the Company’s current liabilities exceed its current assets by E41,295E42,496 as of September 30, 2015,March 31, 2016, and there is no assurance that cash will become available to pay current liabilities in the near term. Management is seeking additional financing but there can be no assurance that management will be successful in any of those efforts. These conditions raise substantial doubt about our ability to continue as a going concern.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated.

FOREIGN CURRENCY TRANSLATION

The Company translates non-Euro assets and liabilities of its subsidiaries at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the average rate of exchange throughout the period. Unrealized gains or losses from these translations are reported as a separate component of comprehensive income. Transaction gains or losses are included in general and administrative expenses in the consolidated statements of operations. The translation adjustments do not recognize the effect of income tax because the Company expects to reinvest the amounts indefinitely in operations. The Company's reporting currency is the Euro because substantially all of the Company's activities are conducted in Europe.

CASH

Cash deposits are occasionally in excess of insured amounts.

REVENUE RECOGNITION

Generally, exclusive license agreements contain non-refundable terms for payments and, depending on the terms of the agreement, provide that the Company will (i) provide research services which are reimbursed at a contractually determined rate which includes margin for the Company, (ii) participate in a joint steering committee to monitor the progress of the research and development which will be reimbursed at a contractually determined rate which includes margin for the Company, (iii) earn payments upon the achievement of certain milestones and (iv) earn royalty payments at the time of commercialization until the later of expiration of the last to expire valid patent rights expire or 10 years after the first commercial sale. The Company may provide technical assistance and share any technology improvements with its collaborators during the term of the collaboration agreements.  The Company does not directly control when any collaborator will request research or manufacturing services, achieve milestones or become liable for royalty payments.  As a result, the Company cannot predict when it will recognize revenues in connection with any of the foregoing.

The Company follows the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605-25, "Revenue Recognition—Multiple-Element Arrangements," and ASC Topic 605-28, "Revenue Recognition—Milestone Method," in accounting for these agreements.  In order to account for these agreements, the Company must identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on if certain criteria are met, including whether the delivered element has stand-alone value to the collaborator.  The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Factors considered in this determination include the research and manufacturing capabilities of the collaborator and the availability of technology research expertise in the general marketplace.marketplace

When the performance under a fixed price contract can be reasonably estimated, revenue for such a contract is recognized under the proportional performance method and earned in proportion to the contract costs incurred in performance of the work as compared to total estimated contract costs. Costs incurred under fixed price contracts represent a reasonable measurement of proportional performance of the work. Direct costs incurred under collaborative research and development agreements are recorded as research and development expenses. If the performance under a fixed price contract cannot be reasonably estimated, the Company recognizes the revenue on a straight-line basis over the contract term.

 In September 2014, the Company entered into a material transfer agreement and fixed price contract with Texas Biomedical Research Institute. The agreement provides Texas Biomedical Research Institute the lead of a project which has been proposed to the Bill and Melinda Gates foundation with the objective to confirm previous results obtained in non-human primates with these virosome based HIV vaccine candidates. The Company has tested these different formulations of virosome based HIV vaccines candidates in preclinical non-human primate studies and in Phase I clinical settings. The Company will produceproduced and transfertransferred to Texas Biomedical Research Institute the original material using the Company’s background IP. Results of the project with Texas Biomedical Research Institute was received in April 2016 (see note on subsequent events). The Company recognizes revenue under the proportional performance method and recognized E154 for the nine months ending September 30, 2015. In addition, fees received in advance for research and development services are recorded as deferred revenue and recognized ratably over the period that the services are provided.method.

In November 2014, the Company signed an agreement with PATH Malaria Vaccine Initiative (MVI) and the Laboratory of Malaria Immunology and Vaccinology (LMIV) of the National Institute of Allergy and Infectious Diseases (NIAID), where Mymetics will develophas developed and produceproduced virosome based vaccine formulations for a malaria transmission-blocking vaccine candidate which will beare based on two antigens provided by LMIV. The vaccine formulations willwere then be tested in animal models. PATH MVI will fundfunded all activities under this project, which started in January 2015.2015 and ended in January 2016. The Company recognizeshas recognized revenue under the proportional performance method and recognized E250 for the nine months ending September 30, 2015. In addition, fees received in advance for research and development services are recorded as deferred revenue and recognized ratably over the period that the services are provided.

RECEIVABLES

Receivables are stated at their outstanding principal balances. Management reviews the collectability of receivables on a periodic basis and determines the appropriate amount of any allowance. There was no allowance necessary at September 30, 2015March 31, 2016 or December 31, 2014.2015. The Company charges off receivables to the allowance when management determines that a receivable is not collectible. The Company may retain a security interest in the products sold.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost and is depreciated over its estimated useful life on straight-line basis from the date placed in service. Estimated useful lives are usually taken as three years.

IN-PROCESS RESEARCH AND DEVELOPMENT

In-process research and development (referred to as IPR&D) represents the estimated fair value assigned to research and development projects acquired in a purchased business combination that have not been completed at the date of acquisition and which have no alternative future use. IPR&D assets acquired in a business combination are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated research and development efforts. During the periods prior to completion or abandonment, those acquired indefinite-lived assets are not amortized but are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired.

Long-lived assets, which include property and equipment, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The impairment testing involves comparing the carrying amount to the forecasted undiscounted future cash flows generated by that asset. In the event the carrying value of the assets exceeds the undiscounted future cash flows generated by that asset and the carrying value is not considered recoverable, impairment exists. An impairment loss is measured as the excess of the asset’s carrying value over its fair value, calculated using a discounted future cash flow method. An impairment loss would be recognized in net income in the period that the impairment occurs.

GOODWILL

 Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value based test. Goodwill is assessed for impairment on an annual basis as of April 1 of each year, unless events or circumstances indicate impairment may have occurred before that time. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. After assessing qualitative factors, the Company must determine if further testing was necessary. If further testing was necessary, the Company would have performed a two-step impairment test for goodwill. The first step requires the Company to determine the fair value of each reporting unit. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform a second more detailed impairment assessment. The second impairment assessment involves allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in order to determine the implied fair value of the reporting unit’s goodwill as of the assessment date. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date.

The Company has conducted its impairment testing as of April 1, of 20152016 and 20142015 of its goodwill recognized in connection to the acquisition of Bestewil. In conclusion of this impairment testing, the carrying amount of the reporting unit was lower than the estimated fair value of the reporting unit. As the fair value of the reporting unit is higher than the carrying amount, Step 2 of the goodwill impairment test did not need to be completed. As of September 30, 2015,March 31, 2016, management believes there are no indications of impairment.

RESEARCH AND DEVELOPMENT

 

TAXES ON INCOME

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates.

The Company reports a liability, if any, for unrecognized tax benefits resulting from uncertain income tax positions taken or expected to be taken in an income tax return. Estimated interest and penalties, if any, are recorded as a component of interest expense and other expense, respectively.

The Company has not recorded any liabilities for uncertain tax positions or any related interest and penalties at September 30, 2015March 31, 2016 or at December 31, 2014.2015. The Company’s United States tax returns are open to audit for the years ended December 31, 20102012 to 2014.2015. The returns for the Swiss subsidiary, Mymetics S.A., are open to audit for the years ended December 31, 20112010 to 2014.2015. The returns for the Netherlands subsidiaries, Bestewil B.V. and Mymetics B.V., are open to audit for the year ended December 31, 2014.2015.

 

EARNINGS PER SHARE

 Basic earnings per share is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding in the period. Diluted earnings per share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive securities. For the quarterquarters ended September 30,March 31, 2016 and 2015, options and convertible debt were not included in the computation of diluted earnings per share because their effect would be anti-dilutive due to net losses incurred under the treasury stock method.

For the three months ended September 30,March 31, 2016, the basic weighted average number of shares was 303,757,622. The total potential number of shares issuable of 559,614,329 at March 31, 2016 includes 530,034,329 potential issuable shares related to convertible loans and 29,580,000 potential issuable shares related to outstanding not expired options granted to employees.

PREFERRED STOCK

The Company has authorized 5,000,000 shares of preferred stock that may be issued in several series with varying dividend, conversion and voting rights. No preferred shares are issued or outstanding at September 30, 2015March 31, 2016 or December 31, 2014.2015.

STOCK-BASED COMPENSATION

 Compensation cost for all share-based payments is based on the estimated grant-date fair value. The Company amortizes stock compensation cost ratably over the requisite service period.

The issuance of common shares for services is recorded at the quoted price of the shares on the date the shares are issued. As part of the 2013 stock option plan, the Company issued 8,850,000 shares to individuals in the nine months ended September 30, 2015. No shares were issued to individuals for the three months ended September 30, 2015. No shares were issued to individuals as fee for services rendered in the ninethree months ended September 30, 2014.March 31, 2016 nor in the three months ended March 31, 2015.

Stock compensation expense amounted to E119E28 and E33 during the nine month periods ended September 30, 2015 and 2014, respectively, and E81 and E16E15 during the three monthmonths periods ended September 30,March 31, 2016 and 2015, and 2014, respectively, whichand is included in the statementsstatement of operations within general and administrative expenses.

ESTIMATES

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

FAIR VALUE MEASUREMENTS

FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company generally has the following financial instruments: cash, receivables, accounts payable, and notes payable. The carrying value of cash, receivables and accounts payable, approximates their fair value based on the short-term nature of these financial instruments. Management believes that it is not practicable to estimate the fair value of the notes payable due to the unique nature of these instruments.

CONCENTRATIONS

RELATED PARTY TRANSACTIONS

An individual employed by the law firm that acts as the Company's general counsel is a member of the Board of Directors.  The Company incurred professional fees to the counsel's law firm totaling E8E5 and E46E7 for the period of three months ended March 31, 2016 and nine months ending September 30, 2015, and E14 and E39 for three and nine months ending September 30, 2014, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

Note 2. Intangible Assets

Note 3. Debt Financing

Certain principal shareholders have granted the Company secured convertible notes (in accordance with the Uniform Commercial Code in the State of Delaware) and short term convertible notes, which have a total carrying value of E42,458E43,719 including interest due to date. Interest incurred on these notes since inception has been added to the principal amounts.

 

Note 4. Subsequent Events

GENERAL

The following discussion and analysis of the results of operations and financial condition of Mymetics Corporation for the periods ended September 30,March 31, 2016 and 2015 and 2014 should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 20142015 and related notes and the description of the Company's business and properties included elsewhere herein.

This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report are not purely historical, but are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward looking statements concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Words such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue", "probably" or similar words are intended to identify forward looking statements, although not all forward looking statements contain these words.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date hereof to conform such statements to actual results or to changes in our expectations.

Readers are urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation disclosures made under the captions "Management Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors," "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements" included in our annual report on Form 10-K for the year ended December 31, 20142015 and, to the extent included therein, our quarterly reports on Form 10-Q filed during fiscal year 2015.

Revenue was E694E405 and E635E662 for the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively. E399 and E635 relate to the research and development services provided under a License and Collaboration Agreement for the RSV vaccine signed on December 23, 2013 for the respective periods ending September 30, 2015 and 2014. For the three months ended September 30, 2015, additional revenue of E246 was received from the grant revenue recognized for the HIV and malaria projects.

Costs and expenses increaseddecreased to E2,748E376 for the ninethree months ended September 30, 2015March 31, 2016 from E2,274 (20.8%E969 (-61.2%) for the ninethree months ended September 30, 2014,March 31, 2015, mainly due to an increase in general and administrative costs and research and development costs andthe reversal of aged R&D cost accrual of E154 during the three months ended March 31, 2016. For the 3 months period ending March 31, 2016, foreign exchange revaluation of mainly positionsexisting US$ based loans from third party investors generated an unrealized gain of E92. For the 3 months period ending March 31, 2015, foreign exchange revaluation of existing US$ based loans from third party investors generated an unrealized loss of E234, while this was off-set against gains in USD.

Research and development expenses increaseddecreased to E1,376E109 in the current period from E1,137 (21.0%E367 (-70.3%) in the comparative period of 2014,2015,  mainly due to the additional work related toreversal of aged R&D cost accrual of E154 during the MACIVIVA project with Horizon 2020/SERI, the malaria project with MVI -PATH and the HIV project with Texas Biomedical.three months ended March 31, 2016.

General and administrative expenses increaseddecreased to E1,216E343 in the ninethree months ended September 30, 2015March 31, 2016 from E1,043 (16.6%E393 (-12.7%) in the comparative period of 2014. This is due to legal cost provision reversal in the nine month period ended September 30, 2014, and several additional cost incurred this year, such as; stock option expenses increase related to new issuances; additional marketing cost related to the projects press releases; new contract with exclusive financial advisor; company website design and increase in laboratory space in Leiden.2015.

Interest expense decreased to E1,928E642 for the ninethree months ended September 30, 2015March 31, 2016 from E1,954E643 for the ninethree months ended September 30, 2014March 31, 2015 related to existing loans from third party investors.

The Company reported a net loss of (E2,306)(E593), or (E0.01)(E0.00) per share, for the ninethree months ended September 30, 2015,March 31, 2016, compared to a net loss of (E2,577)(E953), or (E0.01)(E0.00) per share, for the ninethree months ended September 30, 2014.March 31, 2015.

LIQUIDITY AND CAPITAL RESOURCES

We had cash of E2,648E1,997 at September 30, 2015March 31, 2016 compared to E1,614E2,381 at December 31, 2014.2015.

 OnOur first significant revenue has been generated through the exclusive negotiation fee recorded in September 9, 2013 and the license and collaboration agreement for our RSV vaccine signed on December 27, 2013,2013. As consideration Mymetics has entered inhad received an irrevocable and non-refundable upfront fee for the license of USD 5 million at the beginning of 2014 and we have received fixed monthly collaboration and R&D fees. Due to athe ending of the License and Collaboration Agreement (“LCA”) with RSV Corporation (“RSVC”)RSVC, for 2016, we anticipate to license Bestewil Holding BV, a 100% subsidiary of Mymetics’ Corporation virosome technologyrecognize small revenues related to developing, commercializing respiratory syncytial virus (RSV) virosome vaccines for the purpose ofresearch and development activities related to the RSV vaccine and eventual commercialization, whichsome revenues related to the Horizon 2020 project. New significant revenues will generate revenuenot be expected, unless and until a second major licensing agreement or other commercial arrangement is entered into with respect to support the running cost of Bestewil Holding BV.our technology.

As of September 30, 2015,March 31, 2016, we had an accumulated deficit of approximately E70E71 million, and had net loss of E2,306E593 in the ninethree month period ending on that date. We expect to continue to incur net losses in the future for research, development and activities related to the future licensing of our technologies, and because of the accrual of interest payable on existing loans.

Net cash providedused in operating activities was E1,019E378 for the ninethree month period ended September 30, 2015March 31, 2016 mainly due to the pre-paymentdecrease in research and development revenue received related to the MACIVIVA project from the Swiss and EU granting organizations.RSV Corporation. During the ninethree month period ending September 30, 2014March 31, 2015 net cash provided in operating activities was E2,656 due to the decrease in receivables after having received the upfront cash payment related to the LCA.E39.

Investing activities used cash of (E18)was NIL during the ninethree months ended September 30, 2015,March 31, 2016, compared to (E16)(E7) of cash used for the comparable period in 2014, all2015 related to the purchase of equipment for our laboratory in Leiden.

Financing activities for the ninethree months ended September 30,March 31, 2016 and March 31, 2015 is NIL compared to (E1,538) of cash provided for the nine month period ended September 30, 2014, related to the repayment of a loan.NIL.

Salaries and related payroll costs represent gross salaries for two executives, our CSO of Mymetics BV and nineseven employees. Under Executive Employment Agreements with our CEO and two CSOs, we pay our executive officers a combined amount of E65 per month.

Our Swiss subsidiary, Mymetics S.A., has two employees on its payroll: Director of Finance and Head of Manufacturing and Quality. Mymetics BV has, in addition tobesides the full time Chief Scientific Officer, sixfour full-time assistantstechnicians and one part-time assistant.

 In the past, we have financed our research and development activities primarily through debt and equity financings from various parties.

Monthly fixed and recurring expenses for "Property leases" of E14 represent the monthly lease and maintenance payments to unaffiliated third parties for our offices, of which E4 is related to our executive office located at Route de la Corniche 4, 1066 Epalinges in Switzerland (100 square meters), and E10 related to Bestewil Holding B.V. and its subsidiary Mymetics B.V operating from a similar biotechnology campus near Leiden in the Netherlands, where they occupy 150 square meters.

Included in professional fees are legal fees paid to outside corporate counsel and audit and review fees paid to our independent accountants, and fees paid for investor relations.

Cumulative interest expense of E14,678E15,954 has been accrued on all of the Company’s outstanding notes and advances (see detailed table in Note 3 to the financial statements).

OFF-BALANCE SHEET ARRANGEMENTS

We are exposed to market risk from changes in interest rates which could affect our financial condition and results of operations. We have not entered into derivative contracts for our own account to hedge against such risk.

INTEREST RATE RISK

Fluctuations in interest rates may affect the fair value of financial instruments. An increase in market interest rates may increase interest payments and a decrease in market interest rates may decrease interest payments of such financial instruments. We have no debt obligations which are sensitive to interest rate fluctuations as all our notes payable have fixed interest rates, as specified on the individual loan notes.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and determined that our disclosure controls and procedures were effective.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No changes of internal control over financial reporting were made in the ninethree months ended September 30, 2015.March 31, 2016.

INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS

Our management, Ronald Kempers, who is now both CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. 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 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. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or 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 on 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. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.