Integrative Health Technologies, Inc. - Quarterly Report of Financial Condition (10QSB)

---

---

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549

FORM 10-QSB

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

For the quarterly period ended September 30, 2007

 

o Transition report pursuant to Section 13 or 15(d) of the Exchange Act

For the transition period from  _________ to _________

Commission File Number: 814-00699

INTEGRATIVE HEALTH TECHNOLOGIES, INC.

(F/K/A SENTICORE, INC.)

(F/K/A HOJO HOLDINGS, INC.)

(Exact name of registrant as specified in charter)

 

DELAWARE (State of or other jurisdiction of incorporation or organization)

11-3504866 (IRS Employer I.D.  No.)

 

4940 Broadway, Suite 201

San Antonio, TX  78209

(Address of Principal Executive Offices)

 

[phone]

(Registrant's Telephone Number, Including Area Code)

 

Check 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 requirements for the past 90 days.    YES x     NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:

o Large accelerated filer

o Accelerated filer

x Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES o   NO x

Indicate the number of shares outstanding of each of the issuer’s classes of stock on August 15, 2007:    40,704,483 Common Shares

---

INTEGRATIVE HEALTH TECHNOLOGIES, INC.

(F/K/A SENTICORE, INC. & HOJO HOLDINGS, INC.)

 

INDEX TO FORM 10-QSB

 

		Page
	PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
	Consolidated Balance Sheet for September 30, 2007	3
	Consolidated Statements of Operations for the three and nine months ending September 30, 2007 and 2006	4
	Statements of Cash Flows for the nine months ending September 30, 2007 and 2006	5
	Statements of Stockholders' Deficit from inception to the quarter ending September 30, 3007	6
	Notes to Financial Statements	7 – 10
	NOTE 1: FORMATION AND OPERATIONS OF THE COMPANY
	Formation
	Business Description
	NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
	Development Stage
	Basis of Presentation
	Management’s Use of Estimates
	Stock-Based Compensation
	Valuation of Long-Lived and Intangible Assets
	Earnings/(Loss) Per Share
	NOTE 3: INCOME TAXES
	NOTE 4: RELATED PARTY TRANSACTIONS
	Operating Agreement with Health & Medical Research, Inc. (“HMRI”)
	Operating Agreement with HealthTech Development, LLC. (“HTD”)
	Operating Agreement with HealthTech Products, LLC. (“HTP”)
	Acquisition of 8% ownership in AlgaeCal International
	Sale of Taj Systems shares
	NOTE 5: HISTORICAL AND CURRENT FINANCIAL HIGHLIGHTS
	Graphic Representation of Number of Issued and Outstanding Shares
	Graphic Representation of Cash Flow in AlgaeCal International
	NOTE 6: REVERSE SPLIT
	NOTE 7: SUBSEQUENT EVENTS
	Exchange of Assets for Liabilities
	Reverse Split
	Reduction of Conversion Ratio of Preferred Stock from 400 to 1 to 2 to 1
	De-electing to be Regulated as a BDC
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (including Cautionary Statement)		11
	Preliminary Note Regarding Forward-Looking Statements
	Overview and History
	Changes in Investment Strategy and Operating Policies and Actions Taken by Current Management
	-  Overview
	-  Scientific Advisory Board
	-  Recapture of outstanding shares
	-  Liquidation of non-core unrelated holdings and assets
	-  Operating expenses met through managerial fees received from portfolio companies
	Activities of Portfolio Companies
	-  Health and Medical Research, Inc.
	-  HealthTech Development, LLC
	-  HealthTech Products, LLC
	Additional Information
	How portfolio companies impact a BDC’s profit or loss
	How portfolio companies impact a non-BDC’s profit or loss
	Change in BDC status causes change in focus for profit and loss
	Planned restatement of financial statements
	Critical Accounting Policies
Item 3. Controls and Procedures		14
	Quarterly evaluation controls
	CEO/CFO certifications
	Disclosure controls and internal controls
	Limitations on the effectiveness of controls
	Scope of the evaluation
	Conclusions
Item 4. Quantitative and Qualitative Disclosures about Market Risk		15
	(1)  Uncertainties of reorganization and restructuring
	(2)  Uncertainties of the effects of the Company’s previous BDC status
	(3)  Uncertainties of resolution of unresolved issues inherited from previous management
	PART II. OTHER INFORMATION
Item 1. Legal Proceedings		17
Item 2. Defaults Upon Senior Securities		17
Item 3. Submission of Matters to a Vote of Securities Holders		17
Item 4. Other Information		17
Item 5. Exhibits and Reports on Form 8-K		17
	Signatures	17

- 2 -

---

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

INTEGRATIVE HEALTH TECHNOLOGIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		September 30,
		2007				2006
ASSETS
CURRENT ASSETS
Available for sale Investments--Public Companies		$	16,348			$	576,741
Investment in Non-Publicly traded companies			452,000				110,000
Controlled Companies  (Non-Publicly traded)			6,851,682				7,537,640
Cash and cash equivalents			10,859				29,860
Accounts Receivable from Nutmeg, LLC			225,171				-
Inventory			94,933				-
TOTAL CURRENT ASSETS			7,650,994				8,254,241
PROPERTY AND EQUIPMENT
Furniture, equipment, computers & peripherals, Net			20,000				23,000
OTHER ASSETS
Prepaid Clinical Trials			1,234,463				1,234,463
Net Other Assets			--
TOTAL ASSETS		$	8,905,457			$	8,254,241
LIABILITIES AND STOCK HOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts Payable			225,171				381,225
Notes Payable			-				-
Stockholder Loans Payable			-				-
TOTAL LIABILITIES		$	225,171			$	381,225
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 200,000,000 shares authorized;         40,704,597 issued and outstanding			40,705				181,145
Additional Paid-in-Capital			12,350,069				3,972,662
Deficit Accumulated in Developmental Stage			(2,769,193	)			(2,496,640	)
TOTAL STOCKHOLDERS' EQUITY		$	9,621,580			$	1,657,167
Shares Outstanding (2006 Adjusted Using Retroactive Application of 200:1 Reverse Split)			40,704,483				40,905,726
NET ASSET VALUE PER SHARE - fully diluted		$	0.2364			$	0.0091

 

The accompanying notes are an integral part of these consolidated un-audited financial statements.

- 3 -

---

INTEGRATIVE HEALTH TECHNOLOGIES

CONSOLIDATED STATEMENT OF OPERATIONS

 

		THREE MONTHS ENDING								NINE MONTHS ENDING
		September 30,								September 30,
		2007				2006				2007				2006
INCOME FROM OPERATIONS:						$	-							$	-
Fees from clinical trials		$	68,235			$	-			$	292,632			$	-
Consulting, testing and R & D fees			7,136								7,136
Product sales			5,624								5,624
Managerial Fees as a BDC			-				62,281				-				62,281
Total Income			68,235				62,281				292,632				62,281
COST OF SALES
Inventory Cost			2,100				-				2,100				-
Research studies and sales supports			15,811				-				19,180				-
Cost of services and sales			17,911				-				21,280				-
Net income from operations			50,324				62,281				271,352				62,281
EXPENSES:
Administrative expenses and fees			6,788				10,076				10,157				86,421
Stock Based Compensation			-				-				-				-
Loss in equity of LLC			-				-				-				-
Total Expenses		$	6,788			$	10,076			$	10,157			$	86,421
NET INVESTMENT INCOME (LOSS)		$	43,536			$	52,205			$	261,195			$	(24,140	)
NET REALIZED GAIN (LOSS) ON INVESTMENTS			n/a			$	-			$	-			$	-
NET CHANGE IN UNREALIZED GAIN AND LOSSES      ON INVESTMENTS (1) AS A BDC			n/a			$	859,837				n/a			$	859,837
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES			n/a							$	-			$	628,050
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS		$	43,536			$	187,288			$	261,195			$	1,463,747
LOSS PER COMMON SHARE, BASIC & DILUTED
Beginning Retain Deficit		$	(2,921,003	)		$	(3,496,640	)		$	(2,914,093	)		$	(3,773,099	)
Reclassified Previous Capital Expenses						$	664,624							$	664,624
Ending Retained Deficit		$	(2,877,467	)		$	(2,973,977	)		$	(2,652,898	)		$	(2,973,977	)

The accompanying notes are an integral part of these consolidated un-audited financial statements.

- 4 -

---

 

INTEGRATIVE HEALTH TECHNOLOGIES

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For 3 Months Ended September 30,								For 9 Months Ended September 30,
		2007				2006				2007				2006
		as IHT, Inc				as IHHT				as IHT, Inc				as IHHT
CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES
Net investment income (loss)		$	43,536			$	52,205			$	145,468			$	-
Adjustments to reconcile net increase (decrease):
Accounts payable at beginning of period			-				393,683				-				314,176
Accounts payable at end of period			-				381,225				-				381,225
Increase(decrease) in accounts payable			-				12,458				-				(67,049	)
Notes and loans payable at beginning of period			-				614,058				-				614,058
Notes and loans payable at end of period			-				-				-				-
Increase(decrease) in accounts payable			-				(614,058	)			-				(614,058	)
(Increase) decrease in other assets			48,125				-				146,860				-
(Increase) in available for sale investments			-				-				(218,145	)			-
Increase (decrease) in accounts payable and accrued payables			(76,169	)			-				(76,169	)			-
NET CASH PROVIDED (USED) IN OPERATING AND INVESTING ACTIVITIES		$	15,493			$	(549,395	)		$	(1,986	)		$	(681,107	)
CASH FLOWS FROM FINANACING ACTIVITIES
Loan repayments			-				(942,225	)			-				-
NET CASH(USED) IN FINANACING ACTIVITIES			-				(942,225	)			-				-
NON-CASH FLOW INVESTING ACTIVITIES
Issuance of preferred stock (acquisition of company)			-				7,950,688				-				7,950,688
Acquisition of wholly owned subsidiaries			-				(7,950,688	)			-				(7,950,688	)
NET NON-CASH INVESTING ACTIVITIES			-				-				-				-
INCREASE (DECREASE) IN CASH		$	15,493			$	29,748			$	(1,986	)		$	2,138
CASH, Beginning of Period		$	12,206			$	112			$	29,685			$	1,252
CASH, Ending of Period		$	27,699			$	29,860			$	27,699			$	3,390

 

The accompanying notes are an integral part of these consolidated un-audited financial statements.

- 5 -

---

 

INTEGRATIVE HEALTH TECHNOLOGIES

 STATEMENTS OF STOCKHOLDERS' DEFICIT

(UNAUDITED)

 

		Series A				Series A				Additional				Deferred Stock												Additional
		Common				Common				Paid In				and Interest				Preferred				Preferred				Paid-in				Retained
		Shares				Stock				Capital				Compensation				Shares				Shares				Capital				Deficit
		(000's)				(000's)				($)								(000's)				($)				($)
Balances, December 31, 2004			124,031			$	124,031			$	3,571,276			$	(23,750	)														$	(3,717,187	)
Issuance of stock for cash			34,727				34,727				401,386
Issuance of stock for services			22,387				22,387
Amortization of deferred compensation															23,750
Net Income (Loss) for the year																															(55,172	)
Balances, December 31, 2005			181,145			$	181,145			$	3,972,662			$	-															$	(3,772,359	)
Correction of an error											20
Shares canceled			(36,409	)			(36,409	)			36,349
Issuance of stock for acquisitions																			20,000				200,000				7,269,025
Net Income (Loss) for the year																															858,266
Balances, December 31, 2006			144,736			$	144,736			$	4,009,031			$	-				20,000			$	200,000			$	7,269,025			$	(2,914,093	)
Issuance of stock for cash			0				-				-				-				0				-				-
Issuance of stock for acquisitions			0				-				-				-				0				-				-
Effects of Reverse Stock Split			40,497,861				(104,093	)			7,573,118								(20,000	)			(200,000	)			(7,269,025	)
Net Income (Loss) for the quarter																															(6,910	)
Balances, March 31, 2007			40,704,483			$	40,704			$	11,582,149			$	-				0			$	-			$	0			$	(2,921,003	)
Issuance of stock for cash			0				-				-				-				0				-				-
Issuance of stock for acquisitions			0				-				-				-				0				-				-
Net Income (Loss) for the quarter																														$	151,810
Balances, June 30, 2007			40,704,483			$	40,704			$	12,350,069			$	-				0			$	-			$	0			$	(2,769,193	)
Issuance of stock for cash			0				-				-				-				0				-				-
Issuance of stock for acquisitions			0				-				-				-				0				-				-
Net Income (Loss) for the quarter																															43,536
Balances, September 30, 2007			40,704,483			$	40,704,483							$	-				0			$	-			$	0			$	(2,725,657	)

The accompanying notes are an integral part of these consolidated un-audited financial statements.

 

 

 

- 6 -

---

 

 

INTEGRATIVE HEALTH TECHNOLOGIES, INC.

(F/K/A  SENTICORE, INC. & HOJO HOLDINGS, INC.)

NOTES TO FINANCIAL STATEMENTS

NOTE 1. FORMATION AND OPERATIONS OF THE COMPANY

Formation . Integrative Health Technologies, Inc., formerly known as Senticore, Inc. and HOJO Holdings, Inc. (“IHTI”, “the Company”, “we”, “us”, or “our”) was incorporated under the laws of the state of Delaware on January 5, 1999. On February 11, 2005 IHTI elected to become a Business Development Company (“BDC”) and be regulated under the Investment Company Act of 1940 (the “ICA”). From that date to May 7, 2007, the Company operated as a publicly-traded, closed-end investment company which, as a BDC, could raise money in the public sector and invest in the private sector. On May 7, 2007, the Company withdrew its BDC election reporting the change in its filing of Form NT-54C which is attached by reference.

Business Description . During this reporting period IHTI functioned as an operating company deriving its income from cash or equity positions received for services provided by its portfolio companies and two strategic alliances it has established as described in NOTE 4 below. These services include:

(1)	consulting and research and development for companies that lack the resources or capital to conduct their own developmental research,

(2)	on-site biometric testing of body composition, blood chemistries and quality of life inventories, and

(3)	independent clinical trials to provide third-party validation of the safety and efficacy of health-enhancing products, supplements, and technologies.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation. Our accompanying un-audited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-QSB and Article 6 of Regulation S-X of the Securities and Exchange Commission (the "SEC"). Accordingly, these financial statements do not include all of the footnotes required by generally accepted accounting principles. In our opinion, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended Sept 30, 2007 are not necessarily indicative of the results that may be expected for subsequent quarters or for the year ending December 31, 2007. The accompanying financial statements and the notes thereto should be read in conjunction with our audited financial statements as of, and for, the year ended December 31, 2006 contained in our Forms 10-K and 10-K/A which are incorporated herein by reference.

Profits/Losses as a BDC . In previous filings as a BDC, the Company’s profits or losses were determined its operations and from the increases or decreases in the value of its assets, including its investments and its portfolio companies. For those investments of publicly traded stock, valuation was derived from the shares ending price on the day closest to the end of the quarter for which the report was submitted. For its non-publicly traded assets, we used the valuation methodology accepted in the independent audit that was conducted in conjunction with the Company’s merger and reorganization plan which is incorporated herein by reference. Thus, both non-public and publicly traded assets were valued at the beginning of the period and at the end of the period. Changes in these values during the period were reported as a profit or loss.

Comparing BDC and Non-BDC profits and losses. Now that the BDC status has been de-elected, the Company’s profits and losses are determined from solely its day to day operations without the addition of profits earn from increases or decreases in its assets. Thus, a comparison of profits/losses as a BDC with those of a non-BDC can lead to a great deal of confusion. Since the Company’s current and future financial statements are now being prepared on a different basis than were the 2006 statements, we are restating the 2006 financial statements for the third quarter to facilitate comparisons between future and past performance based on operating profits and losses, not increases or decreases in asset values. Thus, comparisons with previous quarter(s) in this filing are “as if” the Company was a non-BDC for the quarter(s) involved. Management believes that the restated financial statements in this filing provide a more accurate picture of the Company’s financial history.

Management’s Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make. Actual results could differ from our estimates.

Stock-Based Compensation . No stock-based compensation was issued during this quarter.

Valuation of Long-Lived and Intangible Assets .   The recoverability of long-lived assets requires considerable judgment and is evaluated on an annual basis or more frequently if events or circumstances indicate that the assets may be impaired. As it relates to definite life intangible assets, we apply the impairment rules as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed Of" as amended by SFAS No. 144, which also requires significant judgment and assumptions related to the expected future cash flows attributable to the intangible asset. The impact of modifying any of these assumptions can have a significant impact on the estimate of fair value and, thus, the recoverability of the asset.

Earnings/(Loss) Per Share.   We compute net earnings/(loss) per share in accordance with SFAS No. 128 "Earnings per Share” (“SFAS No. 128”) and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net earnings/(loss) per share is computed by dividing the net earnings/(loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net earnings/(loss) per share is computed by dividing the net earnings/(loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. For this purpose, each share of Series A Convertible Preferred Stock was treated as 400 common equivalent shares prior to the March 26, 2007 reverse split and two common equivalent shares thereafter.

- 7 -

---

 

INTEGRATIVE HEALTH TECHNOLOGIES, INC.

(F/K/A  SENTICORE, INC. & HOJO HOLDINGS, INC.)

NOTES TO FINANCIAL STATEMENTS

 

 

NOTE 3. INCOME TAXES

The Company is now in the process of filing its 2026 income tax beginning January 1, 2006 using the new EIN number provided to us by the IRS (11-3504866) for this period.

NOTE 4. RELATED PARTY TRANSACTIONS

Operating Agreement with Health & Medical Research, Inc. (“HMRI”)

As reported in previous filings, consistent with the organization and general operating procedures of a BDC, HMRI agreed to become a wholly own subsidiary of IHTI in exchange for IHTI’s transferring its database, testing technology and equipment in HMRI. Consistent with the operating procedures of a BDC, IHTI provided managerial support to HMRI to allow it to develop an income stream from independent clinical trials, of which, the Bone Health study reported in previous filings became its major source of revenues. As a BDC’ HMRI’s asset value from the addition of new test data has been its primary source of IHTI’s unrealized income in addition to profits earned from the execution of clinical trials. Since HMRI’s CEO, Samuel Keith, also served on IHTI’s Board, at the end of each accounting quarter, all net profits as cash or accounts receivable have been transferred to IHTI to avoid any conflict of interest that could be posed by Mr. Keith’s dual positions. Other the changes dictated by the withdrawal of the Company’s BDC status, the reversal of the merger with HMRI and no material changes in the financial information previously filed by the Company for the quarters ending March 31 and June 30, 2007.

Operating Agreement with HealthTech Development, LLC. (“HTD”)

At the time of the merger and reorganization, Gilbert R. Kaats, PhD, (“GRK”) the Company’s President/CEO, owned and operated HTD a consulting and research and development company which was merged into IHTI as a wholly owned subsidiary.  Since the activities of this company overlapped the activities of IHTI, GRK’s continued involvement with HTD could pose a number of conflicts of interest. To avoid this possibility, GRK agreed to maintain ownership of his current intellectual property, but would make it and his networking contacts available to IHTI. GRK also agreed to provide funding as shareholder’s loans when needed for operating capital. This agreement also included the stipulation that, on or about the end of each quarter, all funds, assets and equity positions (e.g., the AlgaeCal acquisition is described in NOTE 4 below) earned and liabilities and loan balances incurred during the quarter would be transferred to IHTI However, in conjunction with the Company’s decision to de-elect its BDC status and function as a normal operating company, the Company and HTD both agreed to reverse the initial merger agreement effective January 1, 2007. Other than excluding the income stream from the increase in the value of its database and the consolidation of financial forms instead of reporting “managerial fees,” there has been no material change in the previously filed financial information  other than that which occurred with IHTI’s de-election of its BDC status.

Strategic Alliance with HealthTech Products, LLC . (“HTP”)

As reported in the independent audit of the assets received from IHT of Illinois, IHTI received an inventory valued at $132,259 consisting of healthcare products and packing and marketing materials. Acting as a distributor for these products, HTP’s revenues are derived from the wholesale and retail of the products and materials. However, the small volume of sales and the significant accounting and managerial requirements for maintaining this subsidiary have proven more costly than the value received from the sales. Furthermore, even though no conflict exists, there is a concern as to the extent to which a research company should be involved in the sale of products it has studied. Additionally, IHTI’s scientific board members and company officers have little sales and marketing experience. Therefore, HTP returned all inventory items to IHTI and both parties agreed to reverse the original Agreement returning HTP to its original owner replacing the subsidiary relationship with a strategic alliance whereby HTP has agreed to purchase IHTI’s inventory items at their replacement, not actual, costs. Conversely, HTP has agreed to provide any of its inventory items to IHTI at HTP’s actual cost.

Strategic Alliance with AlgaeCal International. In October 2006, HTD received 8% ownership in AlgaeCal International as payment for pre-merger and consulting services GRK provided during 2005 and 2006 and for agreeing to conduct a 100-subject clinical trial on the safety and efficacy of AlgaeCal Pro, a bone-health program to be marketed exclusively to healthcare providers. This ownership included a 1% override on all AlgaeCal sales beginning June 2006 and exclusive rights to market AlgaeCal Pro to healthcare providers, the healthcare industry. The initial valuation of this equity position was placed as $320,000 based on information provided by AlgaeCal International suggesting the company was valued at $4,000,000. In June 2006 AlgaeCal’s monthly sales were $1,372 and in October 2007, monthly sales had increased to $228,052 with a six month average of $79,347 as shown in Graph 5 in NOTE 5 below. In view of these increases, we increased our estimated value of the AlgaeCal equity position by 10% from $320,000 to$352,000 which is the value used on this quarter’s balance sheet.

Sale of Taj Systems shares . On August 15, 2006 The Company entered into an agreement with an investment company to purchase sufficient shares of the Company’s stock in Taj Systems, Inc., a pink-sheet company trading under the symbol TJSS, to eliminate all of the Company’s $671,927 outstanding liabilities that it had at closing. The TJSS shares in question are restricted shares and, although not contingent upon convertibility, could have been converted into common stock on August 31, 2006. In January 2007, this investor had paid all but $225,171 of the agreed upon $671,927. The remaining amount is shown as an accounts payable on the current balance sheet. Upon receipt of the final payment, the Company has agreed to convert these restricted shares to free-trading shares and transfer the required number of shares to the investor. The Board of Directors has approved the sale with the restriction that all proceeds must be used for the reduction of outstanding debts, and not for operating capital or executive or consultant compensation.

- 8 -

---

 

INTEGRATIVE HEALTH TECHNOLOGIES, INC.

(F/K/A  SENTICORE, INC. & HOJO HOLDINGS, INC.)

NOTES TO FINANCIAL STATEMENTS

 

 

NOTE 5. FINANCIAL HIGHLIGHTS

Outstanding shares . To allow for a more easily understood history of the Company’s issuances of shares, monthly share issuances have been converted using the 200:1 conversion ratio established in the reverse split in March 2007. As shown in Figure 1, from its inception to June 2006, the Company issued an average of 7,801 (converted at 1:200) shares a month to total of ~910,000 (converted at 1:200) on the date of the reverse merger and reorganization in June 2006. As shown in Figure 2, from June 2006 to September 30, 2007 no additional shares were issued and current management re-captured 22% of the previously outstanding shares either through exchanges for its non-healthcare assets (TJSS) or by cancelling shares that the Company deemed invalid.

 

 

- 9 -

---

 

 

Increase in Sales of AlgaeCal in which Company has an 8% equity position . In October 2006, HTD received 8% ownership in AlgaeCal International as payment for pre-merger and consulting services GRK provided during 2005 and 2006 and for agreeing to conduct a 100-subject clinical trial on the safety and efficacy of AlgaeCal Pro, a bone-health program to be marketed exclusively to healthcare providers. This ownership included a 1% override on all AlgaeCal sales beginning June 2006 and exclusive rights to market AlgaeCal Pro to healthcare providers, the healthcare industry. The initial valuation of this equity position was placed as $320,000 based on information provided by AlgaeCal International suggesting the company was valued at $4,000,000. In June 2006 AlgaeCal’s monthly sales were $1,372 and in October 2007, monthly sales had increased to $228,052 with a six month average of $79,347 as shown in Graph 5 in NOTE 5 below. In view of these increases, we increased our estimated value of the AlgaeCal equity position by 10% from $320,000 to$352,000 which is the value used on this quarter’s balance sheet. These sales figures are shown in Figure 3 below.

 

 

1.	SUBSEQUENT EVENTS

Events occurring subsequent to the quarter ending September 30, 2007 are reported on the date of the event in the “Overview and History” presented below.

 

- 10 -

---

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Preliminary Note Regarding Forward-Looking Statements

This document contains “forward-looking statements” within the meaning of the private securities litigation reform act of 1995. Prospective shareholders should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the company. Although the company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized. Based on actual experience and business development, the company may alter its marketing, capital expenditure plans or other budgets, which may in turn, affect the company's results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the company or any other person that the objectives or plans of the company will be achieved.

The following discussion and analysis should be read in conjunction with the financial statements and Preliminary Note Regarding Forward-Looking Statements provided above. This section also contains reports of activities and results of operations that occurred in the current quarter up to the filing date of this Form and subsequent to the quarter ending June 30, 2007. In some cases, the conditions and results of operations are reported without accompanying distinctions between the quarter in which these activities and events occurred.

Overview and History

The Company was incorporated as HOJO Holdings, Inc. on January 5, 1999 under the laws of the state of Delaware. The Company was renamed Senticore, Inc. in March 2003 and renamed Integrative Health Technologies, Inc. (“IHTI”, “the Company”, “we”, “us”, or “our”) on August 1, 2006. The Company’s reporting symbol upon completion of the merger and reorganization on June 3, 2006 was SNIO which was subsequently changed to IHHT and changed to the current symbol of IHTI as a result of the reverse merger on March 27, 2007.

April 2, 2007. Company filed a Form 8-K reporting that on February 11, 2005, the Registrant filed Form N-54 in which it elected to become a Business Development Corporation (“BDC”) under the Investment Company Act of 1940.The Registrant believed that this election was valid and reported that it was a BDC. However, the Registrant reported in a Form 8-K filed on February 21, 2007 that it had discovered an irregularity in the filing of the N-54, and that it had concluded, as a result, that it was not and had never been a BDC. Since February 21, 2007, representatives of the Registrant have been in discussion with representatives of the SEC. It is the view of the SEC that the Registrant’s election to become a BDC was a valid election, and that the Registrant remains a BDC despite the statements to the contrary contained in the February 21, 2007 Form 8-K.

 

The Registrant has decided that it would be in the best interests of the Company and its shareholders to render the issue moot by filing a notice of withdrawal of its BDC election under s.54(c) of the Investment Company Act. The Registrant has already filed a preliminary Form 14-C reporting that the decision to withdraw the election has been approved by the Registrant’s Board of Directors and shareholders and will forthwith file a Definitive 14-C notifying the SEC and its shareholders of the withdrawal of its BDC status.

April 10, 2007. Form 14-C filed announcing intention to withdraw its election to be regulated under sections 55 to 65 of the investment company act of 1940, as amended. A copy is attached by reference.

April 17, 2007. Form 10-K   Annual Report for 2006 filed within the required filing period but, without its independent audit completed for the year ending 2006 due to a sudden and unexpected death in the auditor’s family and the contracting of a serious debilitating disease. Attempts to obtain another auditor were precluded by the absence of adequate financial records.

May 2, 2007. Auditor recovers from illness and returns to work, but reports that she will be unable to complete the audit by the May 17, 2007 deadline.

May 7, 2007. Form N-15C filed reporting that the inherent generic difficulties and costs associated with being a BDC and lack of any perceived advantages led the Board of Directors to authorize the withdrawal of this election. Holders of shares of common stock of the Company representing in excess of eighty five and two-tenths percent (85.2%) of the 40,552,397 validly issued shares of the Company, signed the Action By Written Consent in favor of the change. There were no votes cast against the decision to cease being a business development company. A Definitive Information Statement on Schedule 14C was filed by the Company with the Commission on Apr 5, 2007 in connection with the decision, and was mailed to shareholders on that date.

May 17, 2007. Absent completion of the independent audit of the 2006 Annual Filing, NASDAQ removed the Company from the OTC.BB reclassifying it as a Pink Sheet stock. NASDAQ advises that it will consider re-admission as an OTC.BB stock upon submission of Form 15-211C by a sponsoring market maker.

May 21, 2007. The Company filed its 10-Q for the quarter ending March 31, 2007 in the required time frame. On May 31, 2007, the Company received the required audit and, since it differed little from the Company’s 2006 annual filing, it was included in an amendment to the 2006 filing which was filed on June 4, 2007. Thus, in the Company’s view, we have met the required filings for an OTCBB company and are presently taking the required actions to request that we regain our status to be eligible for quotation on the OTCBB.

- 11 -

---

 

 

June 4, 2007. Company files Form 10-K/A amendment to previously filed 10-K with independent auditor’s report with no material differences and with 1% of the financial information provided in the previous 2006 10-K.

June 5, 2007. Company files 8-K explaining that on April 16, 2007 the Company filed its 10-K for the fiscal year ending December 31, 2006 within the required time period for the annual filing. However, the required annual independent audit of the financial statements was not included since the auditor became seriously ill and, in addition, had an unexpected death of a parent, thus preventing the completion of the audit. We had insufficient time and records to employ a replacement auditor before the April 16 filing. In order for a filing to be complete, it must contain all required certifications and have been reviewed or audited as applicable, by an account registered with the Public Company Accounting Oversight Board (PCAOB). Absent the required audit, NASDAQ placed an “e” on the company’s trading symbol, providing a 30-day grace period through May 17, 2007 to complete the filing. Although the PCAOB auditor returned to work in early May, it was insufficient time to complete the audit by May 17th, causing the Company to be removed from the OTCBB and classified as a “Pink Sheet” company on May 21, 2007.

August 1, 2007. Company begins study of the positive effects of the AlgaeCal Bone-Health “cookie” on adolescents participating in normal activities suggests it may also enhance the bone health of those adolescents participating in highly demanding physical activities.  This study is designed to (1) examine that possibility and (2) to explore the feasibility of marketing the bone-health cookie to these adolescents or their parents.

August 23, 2007 . Company announces its program to help raise funds for a charity the company is currently supporting--The Alamo City Mercy Foundation’s orphanage in Kitengela, Africa. JESUS. Hobbs House of Hope, offers hope for the “chokoras”, children of the dirt, who wander aimlessly through the streets of Africa having lost their parents to AIDS and other diseases.

October 15, 2007. The Financial Industry Regulatory Authority (“FINRA) cleared Park Financial Group, Inc.’s request for an un-priced quotation on the OTC Bulletin Board for Integrative Health Technologies, Inc.’s common stock (IHTI) and approved Park’s request for a price quotation at “market pricing” on October 26, 2007.

 

Changes in Investment Strategy and Operating Policies and Actions Taken by Current Management

Overview. As reported in its previous filings, when it assumed control on June 3, 2006, our current management team implemented a number of significant changes to the Company’s previous investing strategy and operating policies. These included but were not limited to cutting costs, focusing the Company on the healthcare and nutritional industries, divesting of unrelated assets, effecting a 200:1 reverse split of the Company’s common stock with a commensurate change in the conversion rights of the Series A Convertible Preferred Stock, obtaining the agreement of IHT-IL’s Scientific Advisory Board to serve as IHTI’s Scientific Advisory Board, recapturing shares issued for unconsummated acquisitions or which merited recapture for various other reasons, and de-electing BDC status.  Except as set out below, these changes are largely complete as of the date of this filing.

IHT-IL’s Scientific Advisory Board agreed to serve as IHTI’s Scientific Advisory Board. After the acquisition of IHT-IL, its Scientific Advisory Board, as listed in Exhibit 99.2, agreed to serve as IHTI’s Scientific Advisory Board. The acquisition of IHT-IL’s assets and Scientific Advisory Board brought a new revenue stream to the Company from managerial fees from its three portfolio companies as discussed below. The Scientific Advisory Board is being compensated by our major shareholders at no expense to the Company.

The number of outstanding shares had been reduced by recapturing shares issued for unconsummated acquisitions. The current management team has pursued a plan to recapture shares that were previously issued in connection with acquisitions that were not consummated.  The Company reported in previous filings that it had successfully recaptured over 22% of the shares previously reported as outstanding and there are still a number of shares with questionable substantiation for their issuance. Historically, at closing, the Company had 181,145,125 ( 905,726 post-reverse) issued and outstanding shares of common stock and 20,000,000 preferred shares convertible into common stock at a 1:400 ratio yielding 8,000,000,000 ( 40,000,000 ) additional shares of common stock for a fully-diluted total of 8,181,145,125 ( 40,905,726 ). Of this total, 107,593,480 (537,967) were freely trading in the “float” and 7,355,800 ( 367,759 ) were on the restricted list.

Using only post-reverse share totals, IHTI now has 40,623,366 issued and outstanding shares, 534,914 of which are in the “float” and 88,552 remain on the restricted list. The number of restricted shares have been reduced by 76% from 367,759 to 88,552 as a function of recapturing invalidly issued shares. Another 70,256 restricted shares have been placed on a stop-transfer administrative hold pending legal action to have they recaptured and voided.

Plan to liquidate all investments unrelated to the healthcare and nutrition industries. Although, as reported in previous filings, the Company has divested itself of various assets unrelated to the healthcare and nutrition industries, it continues to hold some shares in TJSS and in other public companies resulting from investments made by previous management prior to June 3, 2006. Included are shares in Adzone Research, Beere Financial and The Justice Fund. Over time, management expects to liquidate its position in most or all of these investments and apply any funds received to debt reduction and to investment in core activities in the healthcare and nutritional industries.

Operating expenses for the quarter have been met through managerial fees received from its portfolio companies. The Company did not issue any new shares during the consecutive four quarters ended March 31, 2007, funding its activities instead from management fees paid to the Company by its portfolio companies. The Company’s requirement that all of its portfolio companies provide a percentage of their gross receipts from sales and services provided sufficient capital to meet our operating needs this quarter.

- 12 -

---

 

 

Activities of Portfolio Companies

Health and Medical Research, Inc. (“HMRI”), A Clinical Research Organization

Grant received for database analyses

Mannatech Inc. (NASDAQ:MTEX) announced the award of its grant to IHTI for analysis of IHTI’s data base in a March 28, 2006 press release incorporated into this filing as EXHIBIT 99.3.

Testing at Mannatech International’s Annual Sales Meeting

HMRI provided its four mobile testing units to HealthTech Development, LLC. (HTD) to market on-site testing to Mannatech’s sales associates as part of their training program. During the conference, HTD marketed 527 bone-density/body composition tests and 133 blood chemistry test panels. HMRI administered 560 Quality of Life Questionnaires , product usage, and Depression scales which, along with the DEXA and blood tests, were added to HMRI’s database.

The AlgaeCal Bone-Health study

This study is discussed in previous filings and, at the time of this filing, 92% of all subjects have completed the study and these data are now being analyzed for safety and efficacy. Preliminary results suggest that the Bone-Health program is successful in improving bone health, particularly in adolescents and post-menopausal women. If these initial findings are supported in the final report, IHTI’s product marketing portfolio company, HealthTech Products, LLC, will add the Bone-Health Program to its inventory of products.

 

The AlgaeCal Pro study

HMRI began the AlgaeCal Pro study to evaluate the safety and efficacy of a bone-health program designed to be marketed exclusively by healthcare providers. It includes the basic components of the AlgaeCal Bone Health program except that it increases the Vitamin D-3 levels to 2,000 IU and adds Vitamin C, Boron and higher levels of magnesium to the formulation.  To increase compliance, it is packaged in individual and numbered daily servings.

Additional clinical trials and study activities

HMRI continues its involvement with the preparation of study protocols, the review of the scientific literature, and the conducting of pilot studies for a number of clients that may or may not eventuate in grants. These studies involve the effects of nutritional supplements on the growth and development of impoverished children that will be housed in the Hobbs House of Hope in Kitengela, Kenya, Africa; a supplement to treat toe fungus; a variety of wild garlic supplement to maintain healthy cholesterol levels; and the effects of a sugar substitute, trehalose, on diabetic and pre-diabetic subjects. HMRI is currently preparing a manuscript for publication in a peer-reviewed medical journal reporting the results of a study previously completed on the effects of a glucomannan soluble fiber on weight loss and compliance.

HealthTech Development (“HTD”) A Consulting, Research & Development (R&D) Company

Testing at Mannatech International’s Annual Sales Meeting.   HTD positioned four of the Company’s mobile testing units at Mannatech’s annual sales and training conference in Dallas, Texas from March 28 through April 1, 2007. This activity resulted in the sale of 527 Bone Density/Body Composition tests and 133 43-panel blood chemistry tests. These tests were added to HMRI’s database after generating $52,825 of income for HTD. However, since these amounts were largely received with checks and credit cards which were processed subsequent to the conference, this income will be recorded in the quarter ending June 30, 2007.

Acquisition of 8% Ownership of AlgaeCal International. During this quarter, the Company is finalizing its oral Agreement with AlgaeCal International ( www.algaecal.com ) for acquisition of an 8% interest in AlgaeCal International in return for research and development services provided by HTD. The ownership includes a 1% override on all AlgaeCal sales.  The monthly average sales have increased 55% over the monthly average at the beginning of the quarter. The Agreement also includes granting IHTI the exclusive rights to market AlgaeCal Pro, a calcium-strontium vitamin-mineral enhanced supplement to be marketed exclusively to healthcare providers. AlgaeCal Pro will be marketed by HealthTech Products, LLC beginning June 2007.

Research for pilot studies developed or under development. HTD continues to develop research protocols for several studies examining the safety and efficacy of different supplements thought to: (1) reduce stress, (2) provide appetite control, (3) reduce incontinence, (4) improve glucose control, (5) aid in weight control and (6) reduce “at risk” cholesterol levels. Should any of these protocols result in the funding of clinical trials, such trials will be conducted by Health and Medical Research, Inc. However, while all of these protocols are being developed during the reporting period, past experience has taught us that less than half will eventually result in funded clinical trials.

Results of Operations

Additional information. The financial results of our operation during this quarter are summarized in the graphs and the supporting comments under FINANCIAL HIGHLIGHTS above. The section on Changes in Investment Strategy and Operating Policies and Actions Taken by Current Management provides a summary of our day to day operations. Additionally, our website ( www.ihtglobal.com ) provides a copy of this 10-QSB and additional information that relates to the Results of Operations . However, since we have withdrawn our BDC status, in order to clarify the impact it has had on our past operations and the impact it could have on future operations will require a review of how profits and losses are determined for BDCs.

How portfolio companies impact a BDCs profit or loss . To understand the potential impact of our withdrawal of our BDC status during this quarter will require an understanding of how BDCs, as compared to with non-BDCs, compute and report profits and losses.  For the purposes of this discussion, a “portfolio company” will refer to a company in which a BDC has invested, whether wholly-owned or partially-owned, publicly traded or not.

- 13 -

---

 

 

BDCs must continually track the value of their investments in portfolio companies. Any increase in value during a period is reported as a profit for that period, while a decrease in value during a period is reported as a loss for that period. If the portfolio companies are public, the valuation is derived from the ending bid or trading price of the stock on the date of the filing. If the portfolio companies are not public, the BDC must establish an appropriate valuation methodology. In either case, the principle is the same: all the portfolio companies are valued at the beginning of the period and at the end of the period, and the change in these values during the period is reported as a profit or loss.

How portfolio companies impact a non-BDCs profit or loss. A non-BDC computes its profit and loss from subsidiaries according to the consolidation rules under generally accepted accounting principles (“GAAP”). These rules are too complex to fully discuss here, but the general idea is that the subsidiaries’ individual profits and losses are consolidated into the non-BDC parent’s income statement. For example, a non-BDC parent with two wholly-owned subsidiaries that each made a profit of $1,000 during the period would typically have a profit of $2,000 for the period, subject to any “consolidation adjustments”.

 

Change in BDC status causes change in focus for profit and loss performance. The point of the discussion in the previous paragraphs is that while the Company was a BDC, its profits or losses were determined primarily from the increase or decrease in the value of the portfolio companies. Now that the BDC status has been de-elected, the Company’s profits and losses will no longer be impacted by changes in the value of its subsidiaries, but rather by the profit and loss performance of the subsidiaries.

Restatement of financial statements. Since the financial statements going forward will be prepared on a different basis than the historical statements, the Company intends to restate some of its financial statements to facilitate comparisons between future and past performance. Management believes that the restated financial statements, when available, will show the Company earned a profit under the direction of the current management beginning with the third quarter of 2006 through and including this filing.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or GAAP, requires the Company 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. In recording transactions and balances resulting from business operations, the Company uses estimates based on the best information available. The Company uses estimates for such items as depreciable lives and the amortization period for deferred income. The Company revises the recorded estimates when better information is available, facts change or actual amounts can be determined. These revisions can affect operating results.

The critical accounting policies and use of estimates are discussed in and should be read in conjunction with the annual consolidated financial statements and notes included in the latest 10-KSB, as filed with the SEC, which includes audited consolidated financial statements for the fiscal year ended December 31, 2005.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

(1) Uncertainties of reorganization and restructuring. We are continuing to implement a new strategy and new policies as part of the reorganization and restructuring which began on June 3, 2006. Such activities always carry risk as they can place a heavy burden on management time, they require expenditures, and there is never assurance that new strategies or policies will succeed as planned.

(2) Uncertainties of the effects of the Company’s prior BDC status. As disclosed in previous filings, from the time the Company filed its election to become a BDC through the time it withdrew the election, the Company did not fully comply with all regulatory requirements relevant to a BDC. The company has attempted to cure past violations as best it can, and it has now withdrawn its BDC election. However,   withdrawing of the election to be treated as a BDC does not cure any past violations that may have occurred. If there were any violations of the securities laws, remedies for shareholders can include a rescission of a shareholder's investment, fines and penalties, and removal of officers and directors from office.

(3) Uncertainties of the effects of unresolved issues inherited from the previous management. Since taking over management of the Company on June 3, 2006, current management has uncovered a   number of issues that were unresolved by the previous management, some of which are contrary to representations made in the Closing and Merger and Reorganization Agreement. Although we have resolved some of these issues, many remain unresolved. Investors bear the risk that all unresolved issues inherited from previous management have yet to be identified. There is also a risk that some or all of these issues may be incapable of resolution. There is also a risk that some or all of these issues may be more serious than they appear at this time, or they may be more costly to resolve than expected, or both.

General Nature of Unresolved Issues . The general nature of these unresolved issues are gaps in record-keeping and apparent instances of regulatory non-compliance. Among other things, they affect the Company’s tax compliance, its SEC record-keeping requirements, and its shareholder list. A non-exhaustive selection of examples is set forth below:

1)	Despite a representation by previous management to the contrary, no income tax returns have been filed since Senticore acquired HOJO Holdings in March 2003.

2)	The state of the Company’s records has not allowed current management to ensure that all of the required IRS Forms 1099 for stock based compensation and contract labor have been filed.

3)

As of the date of this filing and despite repeated requests made to the Company’s previous management and accountants, we have yet to receive General Ledger information for the period from March 2003 to March 2004 sufficient to allow current management to demonstrate that the Company is in compliance with SEC record-keeping requirements.

 

- 14 -

---

 

4)

The state of the Company’s records does not allow current management to confirm that a share log has been maintained that conforms to SEC record-keeping requirements and that allows current management to answer questions that have arisen with respect to the proper number of shares outstanding. These questions include whether shares were issued for inadequate consideration, whether shares were issued in violation of regulations applicable to BDCs, and whether shares that were to be held in escrow were in fact so held, and if so, whether the terms of the escrows were complied with. The questions concerning inadequate consideration arise mainly in connection with a lack of record-keeping that would allow a reconciliation of the Company’s financial records to its records of issued shares, and in connection with a lack of record-keeping that would accurately track loan proceeds said to have been received but not repaid relating to loans for which shares were issued as collateral. The questions concerning BDC regulations arise because BDCs are prohibited from issuing shares to pay for services rendered, and the Company may have issued such shares while it was a BDC. The escrow questions arise because shares were issued to various parties to be held in escrow pending the completion of acquisitions that were never consummated (the Westar and Smith-Forestal transactions), and these shares were not returned to the Company, and it appears that these shares should have been returned to the Company once it became clear that the transactions would not close.

5)	The minutes of the meetings of the Company’s Board of Directors for periods prior to June 3, 2006 appear to be incomplete.

6)

The state of the Company’s records does not allow current management to fully understand the history of the Company’s relationship to Taj Systems, Inc. (“TJSS”) and the history of prior management’s relationship to TJSS. The President and CEO of TJSS are the former President and CEO of the Company and assumed these positions while serving in the same capacity with the Company. From public filings made before current management became involved with the Company on June 3, 2006, it appears that the Company at one time acquired approximately 44 million shares of TJSS representing 40% of TJSS issued stock. For reasons unclear to current management, it appears that the Company subsequently exchanged its 40% ownership interest in TJSS for a certificate representing 1.4 million convertible preferred shares of TJSS, each convertible to 5 shares of common stock representing a total of 7 million shares of common stock on an “as converted” basis. Since the certificate is for restricted shares, it cannot be converted into free-trading shares until August 31, 2007. Although, these shares could have been converted into free-trading common stock under Rule 144 exemption on August 31, 2006, TJSS management has been unresponsive to our repeated demands to approve the Rule 144 exemption.

Item 4.  Controls and Procedures

Quarterly Evaluation of Controls

As of the end of the period covered by this quarterly report on Form 10-QSB, we evaluated the effectiveness of the design and operation of (i) our disclosure controls and procedures ("Disclosure Controls"), and (ii) our internal control over financial reporting ("Internal Controls"). This evaluation ("Evaluation") was performed by our Chairman and Chief Executive Officer, Gilbert R. Kaats, ("CEO/CFO"). In this section, we present the conclusions of our CEO/CFO based on and as of the date of the Evaluation, (i) with respect to the effectiveness of our Disclosure Controls, and (ii) with respect to any change in our Internal Controls that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our Internal Controls.

CEO/CFO Certifications

Attached to this annual report, as Exhibits 31.1 and 31.2, are certain certifications of the CEO/CFO, which are required in accordance with the Exchange Act and the Commission's rules implementing such section (the "Rule 13a-14(a)/15d–14(a) Certifications"). This section of the annual report contains the information concerning the Evaluation referred to in the Rule 13a-14(a)/15d–14(a) Certifications. This information should be read in conjunction with the Rule 13a-14(a)/15d–14(a) Certifications for a more complete understanding of the topic presented.

Disclosure Controls and Internal Controls

Disclosure Controls are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed with the Commission under the Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time period specified in the Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that others make material information relating to the Company known to the CEO/CFO, particularly during the period in which the applicable report is being prepared. Internal Controls, on the other hand, are procedures which are designed with the objective of providing reasonable assurance that (i) our transactions are properly authorized, (ii) the Company's assets are safeguarded against unauthorized or improper use, and (iii) our transactions are properly recorded and reported, all to permit the preparation of complete and accurate financial statements in conformity with accounting principals generally accepted in the United States.

Limitations on the Effectiveness of Controls

Our management does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well developed and operated, can provide only reasonable, but not absolute assurance that the objectives of the control system are met. Further, the design of the 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. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of a system of controls also 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 objectives under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

- 15 -

---

 

 

Scope of the Evaluation

The CEO/CFO's evaluation of our Disclosure Controls and Internal Controls included a review of the controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this annual report. In the course of the Evaluation, the CEO/CFO sought to identify data errors, control problems, acts of fraud, and they sought to confirm that appropriate corrective action, including process improvements, was being undertaken. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-QSB and annual reports on Form 10-K. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls, and to make modifications if and as necessary. Our external auditors also review Internal Controls in connection with their audit and review activities. Our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.

Among other matters, we sought in our Evaluation to determine whether there were any significant deficiencies or material weaknesses in our Internal Controls, which are reasonably likely to adversely affect our ability to record, process, summarize and report financial information, or whether we had identified any acts of fraud, whether or not material, involving management or other employees who have a significant role in our Internal Controls. This information was important for both the Evaluation, generally, and because the Rule 13a-14(a)/15d–14(a) Certifications, Item 5, require that the CEO/CFO disclose that information to our Board (audit committee), and to our independent auditors, and to report on related matters in this section of the annual report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions". These are control issues that could have significant adverse affect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce, to a relatively low level, the risk that misstatement cause by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employee in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Evaluation, and in each case, if a problem was identified; we considered what revisions, improvements and/or corrections to make in accordance with our ongoing procedures.

Conclusions

Based upon the Evaluation, the Company's CEO/CFO has concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material information relating to the Company is made known to management, including the CEO/CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with accounting principals generally accepted in the United States. Additionally, there has been no change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Internal Controls.

 

 

- 16 -

---

 

 

 

PART II. - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

None.

Item 3 . Defaults Upon Senior Securities

NONE .

.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5 . Other Information

None.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 (b) Exhibits

SIGNATURES

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

SIGNATURE		TITLE		DATE
/s/ Gilbert R. Kaats		Chairman and CEO		November 19, 2007
/s/ Gilbert R. Kaats		Chief Financial Officer		November 19, 2007

 

- 17 -

---