Form 1-SA Teraphysics Corp For: Jun 30

You should read the following discussion and analysis of our financial condition and results of our operations together with our unaudited financial statements and related notes appearing at the end of this semiannual report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled "Risk Factors" in our 1A Offering Circular and elsewhere in this document.

Since our incorporation in 2004, Teraphysics has been engaged primarily in the reinvention and miniaturization of high frequency vacuum electronic devices (VEDs), as well as raising funds to support those efforts from government agencies and investors.

We are a developmental stage company, as we are devoting substantially all of our efforts to establish our technology and business relationships and planned principal operations have not commenced. We successfully tested VED prototypes in October 2014 and since then have continued the advancement of VED technology through R & D efforts, primarily supported by the DARPA Invest program.

Our cash inflow since inception has been $22,979,500 from two primary sources:

Government Agency Contracts $ 7,342,500  

Independent Investors $ 15,637,000  

Total: $ 22,979,500 

Operating Results & Trend Information

We have not generated commercial revenues to date and do not anticipate doing so until late 2019 (our original estimate was late 2017) as anticipated investor funding has been difficult to attain.  Fortunately, external funding over previous years has allowed us to develop breakthrough high millimeter wave (mmw) wireless technology that operates at frequencies generating power levels not previously attainable by semi-conductor or other wireless technologies.  The industry now recognizes the potential for mmw devices to meet expanding 5G data transmission requirements in 2020 and beyond.  The delays we have encountered should not hamper our participation in 5G as 5G standards to any degree, and our commencement of commercialization in 2019 will allow the Company sufficient time to do so.

Next Generation Mobile Networks Alliance (NGMN) published a 5G roadmap for the launch of first commercial systems in 2020. At the same time, it defined a reasonable period for all of the industry to carry out the required activities (such as standardization, testing, trials) ensuring availability of mature technology solutions for the operators and attractive services for the customers at launch date. The key milestones are:

Detailed requirements readied at the end of 2016  

Initial system design in 2018  

Trials start in 2019  

Standards ready end of 2019  

First commercial systems ready in 2020  

As bandwidth requirements continue to grow exponentially a massive densification of "micro cells" is underway in wireless backhaul to increase data transmission capacities between the fiber optic Internet backbone and last-mile smart device users. This (backhaul) space is readily adaptable to the implementation of our high bandwidth mmw technology that will be necessary to meet the substantially enhanced spectrum reuse.

To gain industry acceptance of our transformational technology we will create over-the-air (OTA) radios and construct a prototype high mmw frequency data transmission backhaul system to demonstrate our high data transmission capabilities.  This initial phase of commercialization will also require the construction of a pilot manufacturing facility that we plan on bringing on stream in late-2019.

On July 2, 2015 we initiated a new $750,000 contract with the Air Force Research Laboratory (AFRL) that was completed in September 2017. This contract resulted in $148,300 in revenue during 2015, $557,279 during 2016, and $44,356 in revenue during 2017.  In January 2016 we were selected by DARPA for a $1.57 million, four-year award from the INVEST program which began in April 2016. Revenues recognized in 2016 were $189,735 for this program, and $579,788 in 2017, and 311,050 in the first six months of 2018.  All of these contracts support the development of technology that parallels our interest in commercial telecommunications.

As of June 30, 2018, we had cash of $2,635 and current assets of $591,883.  At that date we had liabilities totaling $6,302,189, with almost 95% payable to:

· Founders and key employees deferred compensation - $2,925,904

· A law firm and patent counsel - $1,286,615

· Professional service firms - $ 398,228

· Individuals - $ 931,427

· Affiliates - $ 336,712

In the past the majority of the above individuals and organizations have agreed to forgo payment of obligations due to them until the Company experiences a monetization event in excess of $50 million. The Company intends to settle all or a portion of these obligations from proceeds of that monetization event or the hypothecation of 1 million shares of Teraphysics Founder common shares at market prices that have been reserved for this purpose.  WE DO NOT INTEND TO PAY ANY OF THESE OBLIGATIONS FROM THE PROCEEDS OF THIS OFFERING.   

Plan of Operations

For the immediate twelve months following the contemplated equity funding reflected in this offering circular, the Company will undertake the first phase of its commercialization plan to build an OTA proven radio, a micro backhaul system and equip a test laboratory.  In following years funds will be used to develop a pilot plant, acquire production capacity, inaugural steps in developing our stratospheric technology platform, and the enhancement of our intellectual property in the higher frequency millimeter wave wireless transmission frequencies.   

The Company has previously engaged an experienced consultant, with a long and successful career in the communications industry, to develop a global wireless strategy to maximize the commercial and enterprise values of the Company’s unique high frequency mmw wireless technology.  To engage a global leading consultant of this caliber, the Company sought out and engaged a top tier executive search firm, and paid this executive search firm a fee of 352,000 shares of its common stock for completing the engagement of this consultant.  

The Company plans on using this market information generated by this consultant in its planned Reg A+ offering leading to a listing on the NASDAQ Exchange sometime in the next 18-24 months following the closing of the offering.

TERAPHYSICS CORPORATION

BALANCE SHEET’S - As of June 30, 2018 and December 31, 2017

TERAPHYSICS CORPORATION

STATEMENT OF OPERATIONS - As of June 30, 2018 and December 31, 2017

TERAPHYSICS CORPORATION

STATEMENTS OF CASH FLOWS - For the six months ended June 30, 2018 and 2017

NOTE 1:  NATURE OF OPERATIONS

Teraphysics Corporation (the “Company”), formerly Teravac Corporation, was incorporated on November 16, 2004 under the laws of the State of Delaware and is licensed to do business in the State of Ohio, where its principal offices are located.  The Company is developing high frequency amplifiers to enable Terahertz (THz) and millimeter wave (mmw) devices in order to bring them to commercial viability for implementation in the Communications, Aerospace, Food Safety, Medical, Pharmaceutical, Security, Solar, Energy and Automotive markets.

As of June 30, 2018, the Company has not commenced commercialization activities.  Since inception, the Company has devoted substantially all of its efforts to research and development of a unique and powerful high frequency amplifier.  Once the Company commences planned principal operations of producing and selling its products, it will incur significant additional expenses in conjunction with producing and selling products commercially.  The Company is dependent upon additional capital resources for the commencement of its planned principal operations and is subject to significant risks and uncertainties; including failing to secure additional funding to operationalize the Company’s planned operations or failing to profitably produce and sell its products.

NOTE 2:  GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has experienced negative cash flows from operations and net losses since inception, including a net loss of $521,876 for the six-month period that ended June 30, 2018, and an accumulated deficit of $22,971,829 as of June 30, 2018, and has not yet realized any commercial revenues from the sale of its products.  The Company’s ability to continue as a going concern for the next twelve months is dependent upon its ability to raise additional capital to finance its operations. The Company’s failure to raise capital could have a negative impact on the financial condition and the ability to pursue certain business strategies.

The Company is seeking funding through interim financing, which could be a combination of equity and/or loan funds. In the event the Company does not complete its interim funding, it may seek additional funding through private financings. No assurance can be given that the Company will be successful in these efforts, as the Company may not be able to obtain financing on acceptable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders.

NOTE 3:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounting and reporting policies of the Company conform to generally accepted accounting principles (GAAP) in the United States of America. All of the Company's operations are considered one operating segment.  In the opinion of management all adjustments necessary in order to make the interim financial statements not misleading have been included.

Related Party Transactions

Technology Royalties

The Company had a royalty arrangement for an unrelated technology with Genvac AeroSpace, Inc., a related party under common control.  The Company received a percentage of its gross revenues on a monthly basis which was to expire on December 31, 2026 and was automatically renewable for two-year term on December 31, 2017.  The agreement was terminated in accordance with the terms of the agreement.  The Company recognized royalty fee income in the amount of $46,197 during the six-month period ended June 30, 2017.

Government Grant Revenue

The Company has been awarded certain federally funded research grants through DARPA and the United States Air Force.  The Company has recognized revenue of $311,050 and $307,752 related to these grants during the six-month period ended June 30, 2018 and 2017, respectively.   

Research and Development

Research and development costs are expensed as incurred.  Total expense related to research and development was $219,448 and $282,279 for the six-month periods ended June 30, 2018 and 2017, respectively.

Marketing Costs

The Company participates in various advertising and marketing programs.  All costs related to marketing and advertising the Company are expensed in the period incurred.  Marketing costs charged to operations were $251 and $892, for the six-month periods ended June 30, 2018 and 2017, respectively.

Offering Costs

The Company complies with the requirements of FASB ASC 340-10-S99-1 with regards to offering costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed.  $353,596 and $352,336 of offering costs were capitalized to the balance sheet as of June 30, 2018 and December 31, 2017, respectively.

Net Earnings or Loss per Share

Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture.  The Company presents basic and diluted net earnings or loss per share.  Basic and diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period.  Potentially dilutive securities are excluded from the computation of the diluted net earnings or loss per share if their inclusion would be anti-dilutive, and consist of the following items on the basis of common shares upon full conversion reflected below:

NOTE 4:  NOTES PAYABLE

Notes payable as of June 30, 2018 and December 31, 2017, respectively, are as follows:

$3,871,871 of the long-term note’s payable are due six months following an initial public offering by the Company, or another monetization event providing proceeds in excess of $50,000,000.  Accordingly, these notes have been included in the following schedule of future maturities to June 30, 2019, which is the Company’s best estimate of when a qualifying event will cause these notes to come due.  The following schedule presents the notes payable by maturity year as of June 30:

NOTE 5:  STOCKHOLDERS’ EQUITY

Preferred Stock

Common Stock

The Company is authorized to issue 95,000,000 shares of common stock at $0.0001 par value.  As of June 30, 2018, and December 31, 2017, 65,824,959 and 65,672,294 shares of common stock are outstanding, respectively.

Common Stock Issuances for the Six-Months Ended June 30, 2018

Loans outstanding, in the combined principal and interest balance of $62,665 were converted into 62,665 shares of common stock at $1.00 per share.  Stock warrants for 90,000 shares were exercised in cashless exercises.

Stock Reservations

The Company has reserved 6,000,000 shares of its common stock pursuant to the 2008 Stock Plan, of which 617,000 and 1,577,000 were available for issuance as of each June 30, 2018 and December 31, 2017 respectively.

Capital Contribution Receivable

During 2012, two notes receivable totaling $590,000 were exchanged for the exercise of stock options from two shareholders.  One note for $500,000 was exchanged for 500,000 shares of common stock and the other for $90,000 in exchange for 750,000 shares of common stock.  These notes bear interest at 2% per annum and are secured by the shareholders’ common shares.  These notes are due upon sale of the shares as specified in the agreement with the shareholders.  The notes are secured by the shares issued in exchange for the respective notes.  The principal of these notes remains outstanding as capital contributions receivable (a contra equity account) as the proceeds have not yet been funded by the stockholders as of the issuance date of these financial statements, in accordance with the asset recognition criteria for capital contributions under FASB ASC 505-10-45-2.  Accrued interest receivable of $64,900 and $59,000 were accrued and receivable as of June 30, 2018 and December 31, 2017, respectively.

Treasury Stock

NOTE 6:  SHARE-BASED PAYMENTS

Stock Plan

The Company has adopted the Teravac Corporation 2008 Stock Incentive Plan, as amended and restated (the “Plan”), which provides for the grant of shares of stock options, stock appreciation rights, and stock awards (performance shares) to employees, non-employee directors, and non-employee consultants.  Under the Plan, the number of shares available to be granted during the life of the plan is 6,000,000 shares.  The option exercise price generally may not be less than the underlying stock’s fair market value at the date of the grant, and the maximum term of an option is ten years.  The amounts granted each calendar year to an employee or non-employee is limited depending on the type of award.  Stock options comprise all of the awards granted since the Plan’s inception.  Shares available for grant under the Plan amounted to 617,000 as of each June 30, 2018 and 1,577,000 December 31, 2017 respectively.  As of June 30, 2018 and December 31, 2017, 1,964,665 and 2,239,111 of outstanding stock options were vested, respectively.  There are 833,335 unvested stock options outstanding at June 30, 2018 and no unvested stock options outstanding at December 31, 2017.  Since the Plan’s adoption,

a total of 5,720,000 stock options have been awarded to employees and non-employee directors and consultants.  These options were awarded at the fair market value at the time of the grant and generally have a ten-year term.   

Vesting generally occurs over a period of immediately to one year for employees and immediately to one year for non-employee directors and consultants.  A summary of information related to stock options for the six-month period ended June 30, 2018 and the year ended December 31, 2017 is as follows:

The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award.  Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for stock options, the expected life of the option, and expected stock price volatility. The Company used the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

No stock-based compensation expense was recognized under FASB ASC 718 for the six-month period ended June 30, 2018 or for the year ended December 31, 2017.  Total unrecognized compensation cost related to non-vested stock option awards amounted to $-0- for both the periods as all options had fully vested and therefore were fully expensed.

Warrants

In December of 2013, the Company commenced certain fundraising activities through the sale of units, at a price of $100,000 per unit, with each unit consisting of 100,000 shares of common stock and one warrant to convert into 100,000 shares of common stock at warrant price of $0.01 per share exercisable immediately upon request.  A total of 2 units were sold during 2013 for total proceeds of $200,000.  The proceeds were recorded to additional paid-in capital and common stock for the issuance of the common stock, and the warrants were recorded at fair value to general and administrative expenses and additional paid-in capital.  The fair value at the grant date was determined to be $0.99 per common share on the warrants, providing $198,000 total fair value for the 2013 issuances, which was recognized immediately in accordance with the immediate vesting.  The warrants have a ten-year term and become exercisable upon request. At December 31, 2013, all outstanding warrants relating to this fundraising were exercisable.  These warrants to purchase 200,000 shares of common stock were exercised in January of 2014, providing proceeds of $2,000.

In January of 2014, the Company commenced certain fundraising activities through the sale of units, at a price of $100,000 per unit, with each unit consisting of 100,000 shares of common stock and one warrant to convert into 100,000 shares of common stock at warrant price of $0.01 per share exercisable immediately upon request.  A total of 2 units were sold during 2014 for total proceeds of $200,000.  The proceeds were recorded to additional paid-in capital and common stock for the issuance of the common stock, and the warrants were recorded at fair value to general and administrative expenses and additional paid-in capital.  The fair value at the grant date was determined to be $0.99 per common share on the warrants, providing $198,000 total fair value for the 2014 issuances, which was recognized immediately in accordance with the immediate vesting.  The warrants have a three-year term and become exercisable upon request. At December 31, 2014, all outstanding warrants relating to this fundraising were exercisable and outstanding.  Subsequent to December 31, 2014, these warrants were exercised in December of 2015 providing proceeds of $2,000.

Common stock warrants were issued in 2010 which carried exercise terms contingent upon and automatically exercisable at an initial public offering.  The warrants were also exercisable into a minimum of 10,000 shares per unit if an initial public offering was not completed prior to expiration after a term of five years.  The Company determined that as of December 31, 2014 an initial public offering prior to the 2015 expiration of these warrants was unlikely and therefore considered these warrants at the aforementioned minimum per unit in the proceeding table of warrants by expiration date.  During 2015, the Company extended these warrants for an additional five years to provide the remaining warrant holders under this arrangement with common stock warrants exercisable into 80,000 shares of common stock in a cashless exercise upon the completion of a liquidity event providing over $100,000,000.  The Company considered these issuances to be contingent upon a future event of minimal likelihood and therefore deemed the 2015 extension issuance to be of trivial value, which would be recognized upon the occurrence of the contingent event.  The company issued 80,000 shares of common stock in 2015 to these warrant holders under the minimum issuance terms of the original 2010 warrant issuances.

maximum number of shares exercisable under these terms (81,000 shares of common stock) in the proceeding table of warrants by expiration date.

In October 2015 through March 2016, the Company issued cashless common stock warrants in conjunction with the issuance of $200,000 of promissory notes in 2015 and $115,000 of promissory notes during the six-month period ended June 30, 2016, as discussed in Note 4.  For each $25,000 promissory note, the note agreements provided for the issuance of 25,000 common stock warrants, resulting in the issuance of 200,000 shares of cashless common stock warrants during 2015 and 90,000 during the six-month period ended June 30, 2016, respectively.  The common stock warrants are exercisable at the earlier of the maturity date of the related promissory notes (two years from the date of the issuance of each promissory note) or upon the repayment of the principal and interest on the promissory notes.  As described below, the Company estimated the fair value of these warrants using the Black-Scholes pricing model.  As the estimated fair value of the warrants issued was determined to be de minimus to these financial statements, a discount to the related promissory notes was not recorded for 2015 or the period ended June 30, 2016.

In June 30, 2016 through June 30, 2017, the Company issued four cashless warrants totaling 100,000 shares in conjunction with promissory notes of $100,000.

The following table sets forth the changes in the number of warrants outstanding for the periods presented:

As discussed above and in Note 4, no expense was recognized related to the issuance of warrants during the six-month period ended June 30, 2017 or the year ended December 31, 2016.

Restricted Stock Unit Awards

In January 2014, the Company issued a contractor 1,500,000 restricted stock unit awards, subject to certain vesting terms whereby portions of the awards become earned, issued, and released from vesting restrictions upon completion of defined milestones.  As of June 30, 2017, and December 31, 2016, none of these milestones had been achieved and therefore none of the restricted stock unit awards under this arrangement have been earned or issued.  The Company will record the fair value of the restricted stock unit awards to additional paid-in capital and expense upon vesting of the restricted stock unit awards.  The restricted stock unit awards received no rights as a stockholder, including voting rights and dividend rights, until vesting occurs.

additional paid-in capital and expense upon vesting of the restricted stock unit awards.  The restricted stock unit awards noted above received no rights as a stockholder, including voting rights and dividend rights, until vesting occurs.

In May 2016, the Company issued a service provider 352,000 restricted stock unit awards, subject to certain vesting terms whereby portions of the awards become earned, issued, and released from vesting restrictions upon completion of defined milestones.  As of June 30, 2017, these shares were vested and issued.

NOTE 7:  INCOME TAXES

The Company recorded a full valuation allowance against its net deferred tax assets for the six-month period ended June 30, 2018 and the year ended December 31, 2017, and therefore has not recognized any further benefit for income taxes on the six-month loss for the period ended June 30, 2018 or related benefits for income taxes. The Company’s effective tax rate differs from the statuary rate primarily as a result of the valuation allowances.  The Company has further deferred tax assets of $6,799,025 as of June 30, 2017 related to net operating loss carryforwards, capital loss carryforwards, research and development (R&D) Credits, and other temporary differences from deferred compensation, and other deferred fees, which were fully reserved at December 31, 2017.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, or the availability of refunds of previously paid taxes. As management does not expect to realize a benefit, the last recorded valuation allowances of $6,799,025 as of December 31, 2017, against net deferred tax assets. Management’s assessment is based on the available evidence both positive and negative including the Company’s historical and projected future taxable income.

The Company had federal net operating loss (“NOL”) carryforwards of approximately $13,000,000 as of June 30, 2017. These NOL carryforwards expire at various dates starting December 31, 2027 for federal returns. The Company had approximately $200,000 of R&D Credits, which have a twenty-year carryover period and will start to expire December 31, 2026. Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an "ownership change" will occur if there is a cumulative change in our ownership by "5-percent shareholders" that exceeds 50 percentage points over a rolling three-year period. Utilization of the Company’s net operating loss and tax credit carryforwards may be subject to annual limitations due to ownership changes. Such annual limitations could result in the expiration of our net operating loss and tax credit carryforwards before utilized.  The Company is subject to U.S. federal income tax examination for calendar tax years ending 2013 through 2015. The company does not have a reserve for any uncertain tax positions, and management is unaware of any anticipated event in the next 12 months that could change this. The Company has not been subject to any penalties or interest by a taxing jurisdiction for income taxes.   The Company operates exclusively out of Ohio which does not impose a corporate income tax.

NOTE 8:  RETIREMENT PLAN

The Company has a 401(k) Profit Sharing Plan covering certain of its employees.  Company contributions to the Plan, including the matching of employee contributions, are at the discretion of the Company.  The Company currently matches an amount equal to 25% of each employee contribution up to 6% of each employee's contribution.

NOTE 9:  RELATED PARTY TRANSACTIONS

Operating Lease

The Company sub-leases office space under a month-to-month operating lease with a related party under common control, Genvac Aerospace, Inc.  Monthly rent payments were $1,863 for the six-month period ended June 30, 2018 and the year ended December 31, 2017.  This agreement is cancellable with 90-day notice.  Rent expense was $11,178 for the six-month period ended June 30, 2018.

Expense Allocation

The Company shares its facility and certain office expenses with Genvac Aerospace, Inc., a related party under common control.  There is an expense allocation agreement in place, originally dated June 1, 2006, which requires the Company to reimburse Genvac Aerospace, Inc. for certain shared expenses.  For the six-month period ended June 30, 2018, the Company reimbursed Genvac Aerospace, Inc. 20% of utility and occupancy costs and 50% of office operating expenses.  This agreement is valid as long as the Company occupies the facility space and is cancellable with 90 days’ notice.

The expense allocations have been determined on the basis that the Company and Genvac Aerospace, Inc. considered to be reasonable reflections of the utilization of services provided or the benefit received by the Company. Management believes that the expenses allocated to the Company are representative of the operating expenses it would have incurred had the Company been operated on a standalone basis.  The Company believes that the assumptions underlying the financial statements are reasonable ; however, the resulting financial information does not necessarily reflect what the Company’s results of operations, financial position, and cash flows would have been had the Company operated independently.   

Total expense recognized under this agreement was $4,938 for the six-month period ended June 30, 2018.

Notes Receivable from Affiliate

The Company is subject to a subordinated loan agreement with a related party under common control, Genvac AeroSpace, Inc. (Genvac) entered on January 1, 2015, as amended.  Under this arrangement, the Company has agreed to lend up to $900,000 with interest at prime plus 1% (5.75% at June 30, 2018).  This agreement expires after five years, when all principal and interest comes due if the agreement is not renewed.  The note is unsecured and fully and irrevocably subordinate in right of payment of all other present and future creditors of Genvac, including Genvac trade and other accounts payable and deferred compensation.  In the event of the appointment of a receiver or trustee of Genvac or in the event of its insolvency, liquidation, bankruptcy, assignment for the benefit of creditors, reorganization, or any other marshaling of the assets and liabilities of Genvac, the Company shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of Genvac until all claims of all or other present and future creditors of Genvac, whose claims are senior, have been fully satisfied, or adequate provision has been made.  As of June 30, 2018 and December 31, 2017, $781,660

and $883,623, respectively, were due to the Company under this arrangement, inclusive of accrued interest.  Related party interest income recognized under this arrangement during the six-month period ended June 30, 2018 and $15,962 for the six-month period ended June 30, 2017.

Technology Royalties

Notes Payable

The Company has various notes payable outstanding with related parties as identified in Note 4 to these financial statements.

NOTE 10: RECENT ACCOUNTING PRONOUNCEMENTS

In June 2014, the FASB issued Accounting Standards Update (ASU)  2014-10 which eliminated the requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flows, and stockholders ’ equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. This ASU is effective for annual reporting periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. Early application is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. Upon adoption, entities will no longer present or disclose any information required by Topic 915. The Company has early adopted the new standard effective immediately.

In August 2014, the FASB issued ASU 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this update provide such guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term  substantial doubt,  (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management ’ s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management ’ s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for public and nonpublic entities for annual periods ending after December 15, 2016.  Early adoption is permitted.  The Company has not elected to early adopt this pronouncement.

In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) ("ASU 2015-05"). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the

arrangement as a service contract. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The Company believes the adoption of ASU 2015-02 will not have a material effect on its financial statements.

Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.

NOTE 11:  SUBSEQUENT EVENT

Management evaluates events occurring subsequent to the date of the consolidated financial statements in determining the accounting for and disclosure of transactions and events that affect the consolidated financial statements.  Subsequent events have been evaluated through September 27, 2018, which is the date the consolidated financial statements were available and best prepared and with the exception of the GanzCorp matter described in Note 4, no other matters of consequence have occurred.