UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
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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 0-50490
INNER SYSTEMS, INC.
-------------------
(Exact name of small business issuer in its charter)
New York 11-3447096
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1895 Byrd Drive, East Meadow, NY 11554
----------------------------------------
(Address of principal executive offices)
(516) 794-2179
--------------
(Issuer's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act):
YES __X__ NO _____
The number of shares outstanding of the issuer's Common Stock, $.001
par value per share, as of August 12, 2008, is 1,000,000.
FINANCIAL INFORMATION
INNER SYSTEMS, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEETS
(unaudited)
________________________________________________________________________________
ASSETS
------
June 30, December 31,
2008 2007
--------- ------------
CURRENT ASSETS
- --------------
Cash ........................................... $ 2,783 $ 2,375
--------- -----------
TOTAL ASSETS ...................................... $ 2,783 $ 2,375
========= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
- -------------------
Accrued interest and other expenses ............ $ 40,083 $ 32,669
Notes payable .................................. 188,670 167,670
--------- -----------
TOTAL LIABILITIES ........................... 228,753 200,339
--------- -----------
CONTINGENCIES
- -------------
STOCKHOLDERS' DEFICIENCY
- ------------------------
Preferred stock, par value $0.001;
5,000,000 shares authorized,
no shares issued and outstanding ................ - -
Common stock, par value $0.001;
20,000,000 shares authorized,
1,000,000 shares issued and outstanding ......... 1,000 1,000
Additional paid in capital ........................ 9,000 9,000
Deficit accumulated during the development stage .. (235,970) (207,964)
--------- -----------
TOTAL STOCKHOLDERS' DEFICIENCY ................. (225,970) (197,964)
--------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY ....................... $ 2,783 $ 2,375
========= ===========
SEE NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS.
2
INNER SYSTEMS, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
____________________________________________________________________________________________________
Cumulative
from
August 9,
Three Months Ended Six Months Ended 2000
June 30, June 30, (Inception)
-------------------------- -------------------------- to June 30,
2008 2007 2008 2007 2008
----------- ----------- ----------- ----------- -----------
NET SALES ............... $ - $ - $ - $ - $ -
GENERAL AND
ADMINISTRATIVE
EXPENSES .............. 20,777 13,041 22,731 16,821 198,465
INTEREST EXPENSE ........ 2,761 2,094 5,275 4,047 27,505
IMPAIRMENT OF
REORGANIZATION
VALUE ................. - - - - 10,000
----------- ----------- ----------- ----------- -----------
NET LOSS ........... $ (23,538) $ (15,135) $ (28,006) $ (20,868) $ (235,970)
=========== =========== =========== =========== ===========
PER SHARE INFORMATION
Basic and diluted, net
loss per share ........ $ (.02) $ (.02) $ (.03) $ (.02)
=========== =========== =========== ===========
Basic and diluted,
weighted average shares
outstanding ........... 1,000,000 1,000,000 1,000,000 1,000,000
=========== =========== =========== ===========
SEE NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS.
3
INNER SYSTEMS, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
________________________________________________________________________________________
Cumulative
from
August 9,
For the Six Months Ended 2000
June 30, (Inception)
------------------------ to June 30,
2008 2007 2008
--------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................. $ (28,006) $ (20,868) $(235,970)
Adjustments to reconcile net loss to
net cash used in operating activities:
Impairment of reorganization value .. - - 10,000
Changes in operating liabilities:
Accrued expenses .................... 7,414 8,525 40,083
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (20,592) (12,343) (185,887)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Notes Payable ............. 21,000 12,495 188,670
--------- --------- ---------
NET INCREASE IN CASH ................. 408 152 2,783
CASH - Beginning .......................... 2,375 2,238 -
- ---- --------- --------- ---------
CASH - Ending ............................. $ 2,783 $ 2,390 $ 2,783
- ---- ========= ========= =========
SEE NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS.
4
INNER SYSTEMS, INC.
(A Development State Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 2008, 2007
And Cumulative From August 9, 2000 (Inception)
________________________________________________________________________________
NOTE 1 - Formation, Nature of Business and Going Concern
-----------------------------------------------
Inner Systems, Inc. (the "Company"), a Delaware company, was organized in May
1997. The Company was in the business of providing concession services. On May
21, 1999, the Company filed a voluntary petition for reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code. The petition was filed in the
United States Bankruptcy Court for the Eastern District of New York and its plan
of reorganization was confirmed on August 9, 2000 ("Inception Date"). As of that
date, 1,000,000 shares of common stock were issued.
Pursuant to the plan of reorganization, the Company sold its operations to an
unrelated third party. Effective August 9, 2000, the Company is in the
development stage and is seeking to raise capital to fund possible acquisitions.
The Company is actively searching for acquisition targets. As of August 15,
2008, the Company had not identified any such targets.
The Company has not commenced principal operations as of June 30, 2008 and there
is no assurance that the Company will have the ability to carry out its business
plan without raising sufficient debt or equity financing. Through June 30, 2008,
the Company has raised $167,670 through debt financing (see Note 4), plus an
additional $21,000 in April and May 2008 that are expected to be converted into
notes on the same terms as the existing notes. Additional funds will be
necessary. Although the Company intends to obtain either additional debt or
equity financing, there can be no assurance that they will be successful. These
factors raise substantial doubt as to the Company's ability to continue as a
going concern. The financial statements do not include any disclosures that
might be necessary should the Company be unable to continue as a going concern.
NOTE 2 - Basis of Presentation
---------------------
The accompanying unaudited condensed financial statements reflect all
adjustments, which are, in the opinion of management, necessary to make the
financial position, results of operations and cash flows not misleading as of
June 30, 2008 and for all periods presented. All such adjustments are of a
normal recurring nature. The results of operations for the three and six months
ended June 30, 2008 are not necessarily indicative of the results that may be
expected for any other interim period or the full year. The condensed financial
statements should be read in conjunction with the notes to the financial
statements and in conjunction with the Company's audited financial statements
for the period August 9, 2000 (Inception) through December 31, 2007, which are
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2007. The accounting policies used to prepare the condensed
financial statements are consistent with those described in the December 31,
2007 financial statements.
5
INNER SYSTEMS, INC.
(A Development State Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 2008, 2007
And Cumulative From August 9, 2000 (Inception)
________________________________________________________________________________
NOTE 3 - Summary of Significant Accounting Principles
--------------------------------------------
STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R "Share Based
Payment." This statement is a revision of SFAS No. 123 and supersedes APB
Opinion No. 25, and its related implementation guidance. SFAS No. 123R addresses
all forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will
be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest. The Company adopted the provisions
of SFAS 123R as of January 1, 2006. The adoption of SFAS No. 123R did not have a
material effect on the Company's financial position, results of operations or
cash flows, as the Company has not issued any SBP awards.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
LOSS PER SHARE
The Company adopted the provisions of SFAS No. 128, "Earnings per Share." SFAS
No. 128 requires the presentation of basic and diluted earnings per share
("EPS"). Basic EPS is computed by dividing the net loss by the weighted-average
number of common shares outstanding for the period. Diluted EPS includes the
potential dilution that could occur if options or other contracts to issue
common stock were exercised or converted. During the period August 9, 2000
(Inception) through June 30, 2008, no options or other contracts to issue common
stock were issued or entered into. 4,903,193 shares issuable upon conversion of
the Company's convertible notes have been excluded from earnings per share as
they were anti-dilutive. Accordingly, basic and diluted earnings per share are
identical. See Note 4 for the issuance of Senior Convertible Promissory Notes,
which contain a contingent conversion feature.
6
INNER SYSTEMS, INC.
(A Development State Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 2008, 2007
And Cumulative From August 9, 2000 (Inception)
________________________________________________________________________________
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
The Company adopted Financial Accounting Standards Board's Interpretation No.
48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109" ("FIN 48"), effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements
and requires the impact of a tax position to be recognized in the financial
statements if that position is more likely than not of being sustained by the
taxing authority. FIN 48 was applied to all open tax years as of the date of
effectiveness. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. There were no unrecognized tax benefits as of January 1, 2008.
The Company has identified its federal tax return and its state tax return in
New York as "major" tax jurisdictions, as defined in FIN 48. Based on the
Company's evaluation, it has been concluded that there are no significant
uncertain tax positions requiring recognition in the Company's financial
statements. The Company's evaluation was performed for tax years ended 2004
through 2007, the only periods subject to examination. The Company believes that
its income tax positions and deductions will be sustained upon audit and does
not anticipate any adjustments that will result in a material change to its
financial position. In addition, the Company did not record a cumulative effect
adjustment related to the adoption of FIN 48. The Company has elected to
classify interest and penalties incurred on income taxes, if any, as income tax
expense. No interest or penalties on income taxes have been recorded during the
six months ended June 30, 2008 or 2007. The Company does not expect its
unrecognized tax benefit position to change during the next twelve months.
Management is currently unaware of any issues under review that could result in
significant payments, accruals or material deviations from its position. The
adoption of FIN 48 did not have a material effect on the Company's financial
position, results of operations or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
In December, 2007, the FASB issued SFAS No. 141 (revised 2007) "Business
Combinations" ("SFAS 141R"). SFAS 141R changes accounting for acquisitions that
close beginning in 2009 in a number of areas including the treatment of
contingent consideration, contingencies, acquisition costs, in-process research
and development and restructuring costs. More transactions and events will
qualify as business combinations and will be accounted for at a fair value under
the new standard. SFAS 141R promotes greater use of fair values in financial
reporting. In addition, under SFAS 141R, changes in deferred tax asset valuation
allowances and acquired income tax uncertainties in a business combination after
the measurement period will impact income tax expense. Some of the changes will
introduce more volatility into earnings. SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008. SFAS 141R will have an impact on
accounting for any business acquired after the effective date of this
pronouncement.
7
INNER SYSTEMS, INC.
(A Development State Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 2008, 2007
And Cumulative From August 9, 2000 (Inception)
________________________________________________________________________________
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160). SFAS
160 will change the accounting and reporting for minority interests, which will
be recharacterized as noncontrolling interests (NCI) and classified as a
component of equity. This new consolidation method will significantly change the
accounting for transactions with minority interest holders. SFAS 160 is
effective for fiscal years beginning after December 15, 2008. SFAS 160 would
have an impact on the presentation and disclosure of the noncontrolling
interests of any non-wholly owned business acquired in the future.
Management does not believe that any other recently issued, but not yet
effective, accounting standards will have a material effect on the accompanying
financial statements.
NOTE 4 - Notes Payable
-------------
The Company financed operations through loans from various investors.
Originally, these loans were evidenced by Demand Promissory Notes bearing
interest at the rate of 6% per annum; however, these Demand Promissory Notes
were exchanged for Senior Convertible Promissory Notes (the "Notes"), which are
convertible into shares of the Company's common stock. The Notes, which
represent $188,670 in the aggregate, including the $21,000 of loans in April and
May, 2008, continue to bear interest at the rate of 6% per annum and are
generally due at the earlier of December 31, 2008, or a Change of Control
Transaction (as defined below). Additionally, the Notes are only convertible
when the Company consummates a Change of Control Transaction. A Change in
Control Transaction shall mean (i) a sale of all or substantially all of the
Company's assets, (ii) a transaction (or series of transactions, including
merger, consolidation or other reorganization of the Company, or issuance of
additional shares of capital stock of the Company other than in connection with
capital raising transactions) which results in the holders of the Company's
capital stock prior to the transaction owning less than 50% of the voting power,
on a fully diluted, as-converted basis for all outstanding classes thereof, of
the Company's capital stock after the transaction or (iii) a liquidation,
dissolution or winding up of the Company. The Notes, including the $21,000 of
loans in April and May, 2008, are convertible at various rates ranging from
$.005 to $.40 per share, representing an aggregate of 4,903,193 shares
potentially issuable. Since the conversion feature in the Notes is contingent on
a future event outside the control of the investors, the contingent beneficial
conversion feature, valued at approximately $98,944 will not be recognized until
the contingency is resolved. At June 30, 2008, interest of $27,505 is accrued.
8
INNER SYSTEMS, INC.
(A Development State Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 2008, 2007
And Cumulative From August 9, 2000 (Inception)
________________________________________________________________________________
The holders of the Notes were also granted Registration Rights with respect to
the shares of common stock issuable upon conversion of the Notes, if they are
converted. These rights are evidenced by a Registration Rights Agreement between
the Company and the holders of the Notes; such registration rights do not become
effective until a Change in Control transaction occurs.
In April and May 2008, the Company received additional advances of $21,000 in
the aggregate. The Company expects that these advances will be converted into
notes on the same terms as the existing notes.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
We continue to finance the Company's operations through the issuance
and sale of the Notes. In addition, in April and May 2008, we borrowed an
additional $21,000 in the aggregate. These funds are expected to be converted
into Senior Convertible Promissory Notes. These funds were utilized to satisfy
accrued expenses and general administrative expenses included in our Statement
of Operations for the six months ended June 30, 2008. We are seeking to acquire
business entities that will generate cash from operations.
We currently rely on loan proceeds or proceeds from the sale of our
securities to fund our operations. There is no assurance that we will be able to
continue generating funds from loans by investors.
For the fiscal year ending December 31, 2008, we anticipate incurring a
loss as a result of expenses associated with compliance with the reporting
requirements of the Exchange Act, and expenses associated with locating and
evaluating acquisition candidates. We anticipate that until a business
combination is completed with an acquisition candidate, we will not generate
revenues. We may also continue to operate at a loss after completing a business
combination, depending upon the performance of the acquired business.
PLAN OF OPERATIONS AND NEED FOR ADDITIONAL FINANCING
During the fiscal year ending December 31, 2008, we plan to continue
with efforts to seek, investigate, and, if warranted, acquire one or more
properties or businesses. We also plan to file all required periodic reports and
to maintain our status as a fully-reporting company under the Exchange Act. In
order to proceed with our plans for the next year, it is anticipated that we
will require additional capital in order to meet our cash needs. These include
the costs of compliance with the continuing reporting requirements of the
Exchange Act as well as any costs we may incur in seeking business
opportunities.
Based upon our current cash reserves, we do not have adequate resources
to meet our short-term or long-term cash requirements. No specific commitments
to provide additional funds have been made by management, the principal
stockholders or other stockholders, and we have no current plans, proposals,
arrangements or understandings with respect to the sale or issuance of
additional securities prior to the location of a merger or acquisition
candidate. Accordingly, there can be no assurance that any additional funds will
be available to us to allow us to cover our expenses. Notwithstanding the
foregoing, to the extent that additional funds are required, we anticipate
receiving such funds in the form of advancements from current stockholders
without issuance of additional shares or other securities, or through the
private placement of restricted securities rather than through a public
offering. As a result, these conditions raise substantial doubt about our
ability to continue as a going concern.
10
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
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. For example, unexpected changes in market conditions or a
downturn in the economy could adversely affect actual results. Estimates are
used in accounting for, among other things, legal liability and contingencies.
Estimates and assumptions are reviewed periodically and the effects of revisions
are reflected in the Financial Statements in the period they are determined to
be necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
-----------------------
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, which is comprised solely of John Sharpe, has
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(c)
and 5d-15(c). Based upon that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures were not
effective as of the end of the period covered by this report. This material
weakness is the result of the Company's complete dependence upon John M. Sharpe,
Jr., who acts as both chief executive officer and chief financial officer, and
the lack of staff with public accounting experience.
Although this constitutes a material weakness in the Company's
financial reporting, management has decided that, in light of the Company's
financial situation and limited operations, the risks associated with the
dependence upon Mr. Sharpe as compared to the potential benefits of adding new
employees, does not justify the expenses that would need to be incurred to
remedy this situation. Management will periodically re-evaluate this situation.
If the situation changes and/or sufficient capital is obtained, it is the
Company's intention to increase staffing to mitigate the current dependence upon
Mr. Sharpe and limited experience with public accounting.
CHANGES IN CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal controls over financial
reporting or other factors which has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not Applicable.
11
ITEM 1A. RISK FACTORS
------------
There are no material changes to the risk factors set forth in Part I,
Item 1A, "Risk Factors", of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2007. Please refer to that section for disclosures
regarding the risks and uncertainties related to the company's business.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not Applicable.
ITEM 5. OTHER INFORMATION
-----------------
In June 2007, it came to the attention of management that the shares
trading under the symbol "ISYM" were the shares of common stock held by the
pre-petition shareholders of the Company (the "Old Shares"). As previously
disclosed in our public filings, these 3,198,948 shares of common stock,
comprising the Old Shares issued to the pre-petition shareholders, were
cancelled when the Company emerged from bankruptcy on August 9, 2000. Effective
August 9, 2000, these Old Shares had no value and should not have been trading.
As a result, in June 2007, the Company advised The Depository Trust & Clearing
Corporation and the CUSIP Service Bureau that these shares were cancelled and
should not be trading. We obtained a new CUSIP number, or identification number,
for the 1,000,000 shares issued to the holders of various claims pursuant to our
Plan of Reorganization and the Order of the Bankruptcy Court approving the Plan
of Reorganization and these shares began trading under the symbol "INSY" on May
12, 2008. Management does not believe that the trading and cancellation of these
shares poses a contingent liability to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. EXHIBITS.
31 Certification of CEO and CFO Pursuant to Section 302
32 Certification of CEO and CFO Pursuant to Section 906
b. FORM 8-K. NONE
12
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNER SYSTEMS, INC.
Date: August 15, 2008 By: /s/ John M. Sharpe, Jr.
-----------------------
John M. Sharpe, Jr., President
13