4. Development Agreement
On August 31, 2010, the Company entered into the Development Agreement with Bayer CropScience AG ("Bayer"), effective September 15, 2010, pursuant to which the Company and Bayer are cooperating in the identification and development of molecules affecting olfaction (the sense of smell) in insects. This approach is designed to exploit advances in neuroscience to safely and effectively prevent crop damage and the spread of human disease by altering insect behavior. This approach may allow for a new level of specificity and efficiency of insect control.
Under the Development Agreement, the Company provides to Bayer proprietary technology for screening particular compounds in Bayer's chemical library that may affect the function of insect odorant receptors. Bayer's efforts have been undertaken as part of a collaborative research project (the "Research Project") with investigators at Columbia and Rockefeller Universities in New York. Support for the Research Project is being provided by a grant award to Columbia from the Foundation for the National Institutes of Health (FNIH) through the Grand Challenges in Global Health initiative (the "Initiative") of the Bill & Melinda Gates Foundation. One of the goals of the Initiative is to improve the control of insects that affect human health, with the ultimate goal of eradication of malaria, Dengue fever and other insect borne diseases in the developing world.
Bayer will determine whether to develop further, for crop control applications, compounds identified in the course of the Research Project.
In connection with the Development Agreement, the Company has granted to Bayer certain exclusive rights to use the Company’s proprietary technology in the field of use of the Development Agreement (any use against invertebrate animals other than the prevention, diagnosis or treatment of human health conditions). Bayer will provide the Company with the opportunity to acquire a license in the field of use to further develop compounds identified by Bayer in the course of the Research Project, which Bayer determines not to further develop itself. Bayer has also granted the Company an exclusive option, that expires five years from the end of the Project Term, as that term is defined below, to negotiate and execute a license from Bayer with respect to compounds identified by Bayer in the course of the Research Project, for use outside the field of use and outside the field of agriculture.
As part of the Development Agreement, Bayer has paid to the Company an upfront nonrefundable $500,000 license fee and has agreed to pay to the Company additional amounts upon achieving certain milestones and royalties on any net sales of products developed pursuant to the project. Consistent with the global access policy of the Initiative and the award agreement to Columbia University from FNIH, the Development Agreement also provides for certain guidelines with respect to distribution and pricing of products for those most in need in disease endemic countries. The Development Agreement provides for a two-year Project Term through September 15, 2012.
The total contract payments of $780,000 (including the $500,000 upfront payment) are recorded as deferred revenue and classified as a short-term and long-term liability on the balance sheet to be recognized over the two-year term. License fee revenue of $195,000 was recognized during the six months ended June 30, 2011.
5. Share-Based Payments
As of August 30, 2010, the Company and two of its consultants agreed to cancel all options issued to such individuals representing 400,000 shares previously issued in March 2008.
On September 8, 2010, the Company adopted the 2010 Stock Incentive Plan ("2010 Plan"). A total of 2,000,000 shares of common stock were eligible for issuance under the 2010 Plan. On that date, the Company granted under the 2010 Plan 500,000 stock options to an officer with an exercise price of $0.28 per share. The options vested immediately and have a ten-year term. Assumptions related to the estimated fair value of these stock options on their date of grant, which the Company estimated using the Black-Scholes option pricing model, are as follows: risk-free interest rate of approximately 2%; expected divided yield of 0%; expected option life of five years; and expected volatility of approximately 190%. The aggregate grant date fair value of the award amounted to $135,450. In addition, the Company granted 250,000 stock options to two of its directors with an exercise price of $0.28 per share. The options vested immediately and have a ten-year term. Assumptions related to the estimated fair value of these stock options on their date of grant, which the Company estimated using the Black-Scholes option pricing model, are as follows: risk-free interest rate of approximately 3%; expected divided yield of 0%; expected option life of ten years; and expected volatility of approximately 190%. The aggregate grant date fair value of the award amounted to $69,850.
On September 8, 2010, the Company also granted 50,000 stock options to an employee with an exercise price of $0.28 per share. The options vest 50% on each of July 1, 2011 and July 1, 2012 and have a ten-year term. Assumptions related to the estimated fair value of these stock options on their date of grant, which the Company estimated using the Black-Scholes option pricing model, are as follows: risk-free interest rate of approximately 2%; expected divided yield of 0%; expected option life of approximately six years; and expected volatility of approximately 190%. The aggregate grant date fair value of the award amounted to $13,700.
On April 19, 2011, the Board of Directors amended the 2010 Plan to decrease the number of shares available under the 2010 Plan from 2,000,000 to 800,000. Such decrease shall be in effect until an amended Certificate of Incorporation is approved by the stockholders of the Company to increase the number of authorized shares of Common Stock such that there are sufficient authorized shares to allow the 2010 Plan to reserve 2,000,000.
On August 5, 2011, the stockholders approved and ratified the 2010 Plan and approved an Amendment to the Company
’
s Certificate of Incorporation increasing the number of authorized shares of Common Stock from 20,000,000 to 40,000,000.
The Company recorded $6,062 and $1,165 of compensation expense for the six months ended June 30, 2011 and 2010, respectively. Total unamortized compensation expense related to unvested stock options at June 30, 2011 amounted to $3,821.
The weighted average period over which share-based compensation expense related to these options will be recognized is approximately 1 year.
The following table summarizes information on all common stock purchase option activity for the six months ended June 30, 2011:
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|
|
|
June 30, 2011
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|
|
|
|
|
Number
|
|
|
|
Weighted Average Exercise
Price
|
|
|
Outstanding, beginning of the year
|
|
|
1,075,000
|
|
|
$
|
0.24
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2011
|
|
|
1,075,000
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2011
|
|
|
1,025,000
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|
|
$
|
0.24
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|
The number and weighted average exercise prices of all common stock purchase options as of June 30, 2011 are as follows:
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|
Range of
Exercise Prices
|
|
|
Remaining
Number
Outstanding
|
|
|
Weighted
Average
Contractual
Life (Years)
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|
|
Weighted
Average
Exercise
Price
|
|
|
|
$0.05 to $0.28
|
|
|
|
1,075,000
|
|
|
|
8.5
|
|
|
$
|
0.24
|
|
All options were issued at an option price at least equal to the market price on the date of the grant, in addition, none of the options currently outstanding have any intrinsic value.
The Company issues new shares of common stock upon exercise of stock options.
6. Notes Payable
During October 2009, the Company issued to each of four individuals $50,000 principal amount of subordinated convertible promissory notes (the “October 2009 Notes”) aggregating $200,000. The individuals included the Company’s Chief Executive Officer and Chairman of the Board, another director, one of the Company’s greater than 5% stockholders and an accredited investor. The $50,000 principal amount of October 2009 Notes issued to the Chief Executive Officer and Chairman of the Board represented $25,000 of new funds received and a rollover of a $25,000 loan made by him to the Company on September 10, 2009. The October 2009 Notes bore interest of 4% per annum and were payable on demand on the earlier of (i) the date on which the Company publicly announced a joint venture or strategic relationship, the execution of a license, or similar agreement with a third-party with respect to the Company’s technology and (ii) the date on which the Company filed with the SEC its annual report on Form 10-K, which included audited financial statements for the year ended December 31, 2009, such date referred to as the target date. The holders were entitled to convert the outstanding principal amount of the October 2009 Notes and accrued and unpaid interest thereon into shares of the Company’s common stock at any time commencing on the fifth trading day immediately following the target date at the conversion price in effect on such date. The conversion price was the greater of (i) the average of the closing sale price of the Company’s common stock for the five trading days immediately following the target date and (ii) $0.05 per share.
The Company was entitled to prepay the October 2009 Notes on 20 days’ prior written notice to the holders. The Company had agreed to include the shares of common stock issuable upon conversion of the October 2009 Notes in any applicable registration statement filed by the Company with the SEC covering its equity securities.
On April 8, 2010, pursuant to the terms of the October 2009 Notes, the conversion price of the October 2009 Notes was set at $0.05. Also, on April 8, 2010, each of the holders elected to convert all of the then outstanding principal and interest on such October 2009 Notes, totaling $203,697, which resulted in the issuance to them of an aggregate of 4,073,943 shares of the Company’s common stock. The conversion of the October 2009 Notes resulted in the October 2009 Notes being satisfied in full.
On April 12, 2010, the Company issued to each of four individuals $20,000 principal amount of promissory notes (a total of $80,000 principal amount) (the “April 2010 Notes”). The investors included the Company’s Chief Executive Officer and Chairman of the Board, a director of the Company who is also a beneficial owner of more than 10% of the Company’s outstanding common stock, another beneficial owner of more than 10% of the Company's outstanding common stock and one of the Company’s greater than 5% stockholders. These April 2010 Notes bore interest at 4% per annum. Principal and accrued interest on the April 2010 Notes were payable on April 12, 2015; provided, however that the April 2010 Notes became due and payable immediately upon the Company’s consummation of an equity financing resulting in net proceeds to the Company in excess of $2,500,000.
On August 12, 2010, the Company's Chief Executive Officer made an interest free loan to the Company in the amount of $20,000 pursuant to a demand promissory note.
On September 7, 2010, the Company borrowed a total of $50,000 ($25,000 each) from a director of the Company who is also a beneficial owner of more than 10% of the Company's outstanding common stock and one of the Company’s greater than 10% stockholders. These loans were made pursuant to a demand promissory note and are non-interest bearing.
On April 19, 2011, the Company and four individuals (the "Note Holders") entered into an exchange agreement pursuant to which the Company received $230,000 in additional funds from the Note Holders and the Note Holders agreed to cancel all the outstanding notes previously issued to them, aggregating $150,000 in exchange for new promissory notes and warrants. Each individual received a new promissory note (the "New Notes"), the principal amount of each New Note is $95,000 (an aggregate principal amount of $380,000) and a warrant (each a "Warrant" and collectively the "Warrants") to purchase 463,415 shares of the common stock of the Company.
The New Notes accrue interest at a rate of six percent per annum, which interest shall be paid quarterly until April 19, 2014, at which time the outstanding principal amount, with interest accrued thereon, shall be due and payable. The New Notes shall become due and payable upon customary events of default or if the Company consummates an equity financing resulting in net proceeds of $4,000,000 or more to the Company.
The four individual holders of the Warrants issued in connection with the New Notes in the aggregate have the right to purchase 1,853,660 shares of common stock at $0.41 per share exercisable for a period of five years. The aggregate fair value of the Warrants issued, amounted to $742,391, which was determined using the Black Scholes option pricing model at $0.40 per warrant utilizing the following assumptions: expected volatility of 201.15%, risk free interest rate of 2.09%, expected term of five years and a market price of $0.41.
The Company estimated the fair value of the Warrants using the Black Scholes option pricing model. In accordance to ASC 470-20 "Debt with Conversion and Other Options", the Company allocated a portion of the proceeds from the New Notes to the Warrants. The relative fair value of the Warrants, which amounted to $251,346, was recorded as a discount to the New Notes. This amount is being accreted to interest expense over the contracted term of the New Notes.
As of June 30, 2011, the carrying value of the New Notes was $145,166. Contractual interest expense under the New Notes amounted to $16,512, which was recorded as a component of interest expense in the accompanying statements of operations.
7. Commitments and Contingencies
The Company entered into a one-year sublease for office space in West Palm Beach, Florida. The sublease expired in June 2010. The Company was renting on a month-to-month basis, for approximately $1,390 per month. During July 2011, the Company relocated to New York and closed its Florida office.
During February 2011, the Company began leasing an office space in New York, on a month-to-month basis for approximately $3,800 per month.
8. Related Party Transactions
Please refer to Notes 5 and 6 regarding related party transactions.
9. Stockholder's Equity
On April 19, 2011, the Company issued Warrants to purchase 1,853,600 shares of the Company's common stock to the Note Holders at an exercise price of $0.41. The Warrants expires on April 19, 2016, and contain a provision allowing for a cashless exercise. The fair value of the Warrants issued, amounted to $742,391, which was determined using the Black Scholes option pricing model at $0.40 per Warrant. The Company recorded the relative fair value as a discount to the New Notes and is being accreted to interest expense over the contracted term of the notes, which amounted to $251,346 (see note 6).
9. Subsequent Events
During
July 2011, the Company entered into a new lease for office space in New York , New York. The lease has a term of one year. The lease requires 12 monthly payments of $3,750 through July 31, 2012.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Information
The following discussion should be read in conjunction with our Financial Statements and Notes thereto, included elsewhere within this report. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements using terminology such as “can”, “may”, “believe”, “designed to”, “expect”, “intend to,” “plan”, “anticipate”, “estimate”, “potential” or “continue”, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. You should read statements that contain these words carefully because they:
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discuss our future expectations;
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·
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contain projections of our future results of operations or of our financial condition; and
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·
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state other “forward-looking” information.
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We believe it is important to communicate our expectations. However, forward-looking statements involve risks and uncertainties and our actual results and the timing of certain events could differ materially from those discussed in or implied by forward-looking statements as a result of certain factors, including those set forth in our Annual Report on Form 10-K for the year ended December 31, 2010. All forward-looking statements and risk factors included in this document or in such Annual Report are made as of the date hereof or thereof, as applicable, based on information available to us as of the date such statements were made, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law.
Introduction
SentiSearch, Inc. (“SentiSearch” or “we” or “us” or “our” or the “Company”) is a Delaware corporation that was incorporated on October 3, 2006. We were previously a wholly-owned subsidiary of Sentigen and were incorporated solely for the purposes of holding the olfaction intellectual property assets of Sentigen and its then subsidiary, Sentigen Biosciences. Prior to the merger between Sentigen and Invitrogen Corporation (“Invitrogen”) that was consummated on December 1, 2006, Sentigen separated its olfaction intellectual property assets from the businesses to be acquired by Invitrogen. This separation was accomplished through the contribution of Sentigen’s olfaction intellectual property assets to us on October 10, 2006 and the subsequent spin-off in which Sentigen distributed 100% of its ownership interest in us to its then stockholders on December 1, 2006. As a result of this spin-off, we became a public, stand-alone company.
The olfaction intellectual property assets that we hold primarily consist of an exclusive worldwide license (the “Columbia License”) issued by The Trustees of Columbia University in the City of New York (“Columbia”), as described below under the heading “Columbia License”, and certain issued patents and patent applications titled “Nucleic Acids and Proteins of Insect or 83b odorant receptor genes and uses thereof.” The olfaction intellectual property assets are also referred to in this Form 10-Q as “our olfaction intellectual property.”
Columbia License
On April 10, 2000, Sentigen Biosciences entered into the Columbia License described below. On October 10, 2006, we entered into a contribution agreement with Sentigen pursuant to which Sentigen transferred to us all of its olfaction intellectual property, including the Columbia License. On October 17, 2006, Columbia consented to the assignment of the Columbia License from Sentigen Biosciences to us subject to certain conditions, all of which have been satisfied to the extent currently required. As of January 30, 2011 the Columbia License was amended such that the license in the patents originally contained in the Columbia License were terminated and, in consideration for such termination, the royalties payable by the Company to Columbia were reduced.
The Columbia License, as amended, provides us with worldwide rights to certain of Columbia’s rights in the areas of insect chemosensation and olfaction. The Columbia License gives us an exclusive license to develop, manufacture, have made, import, use, sell, distribute, rent or lease any product or service that involves the know-how, confidential information and physical materials conveyed by Columbia to us (collectively, the “Licensed Products/Services”). In addition to certain funding requirements by Sentigen, all of which were satisfied, in consideration of the Columbia License, Columbia was issued 75,000 shares of Sentigen common stock in 2006 and will receive royalties of 0.15% of the net sales of any Licensed Products/Services.
The licenses granted to us under the Columbia License expire ten years from the first sale of any Licensed Products/Services.
Patents and Patent Applications
In addition to the Columbia License, we have certain issued patents and patent applications relating to nucleic acids and proteins of insect or 83b odorant receptor genes and their uses. These patents and patent applications relate to the isolation of a gene that appears to be ubiquitous among insects. This gene has been identified in various species of insects, including many that have a profound effect on agricultural production and human health. The identification of this gene, and the protein that it expresses, may enable the development of high-throughput screening methods to discover compounds that attract insects to a particular site (and away from one where their presence is undesirable), or develop materials that are distasteful to the insects’ sense of “smell,” thereby making agricultural products, for example, undesirable to them.
While we believe our technology capabilities in the olfaction area are substantial, up to this point, we have incurred substantial operating losses. As of June 30, 2011, we held four patents in the United States and additional patents in certain foreign countries. We also have additional pending patent applications. We cannot provide any assurance that our additional patent applications will be successful. We intend to continually review the commercial validity of our olfaction technology in order to make the appropriate decisions as to the best way to allocate our limited resources.
Development Agreement
On August 31, 2010, we entered into the Development Agreement, referred to as the Development Agreement, with Bayer CropScience AG, referred to as Bayer. The Development Agreement became effective September 15, 2010. Pursuant to the terms of the Development Agreement, we and Bayer have been cooperating in the identification and development of molecules affecting olfaction (the sense of smell) in insects. This approach is designed to exploit advances in neuroscience to safely and effectively prevent crop damage and the spread of human disease by altering insect behavior. This approach may allow for a new level of specificity and efficiency of insect control.
Under the Development Agreement, we provide to Bayer proprietary technology for screening particular compounds in Bayer's chemical library that may affect the function of insect odorant receptors. Bayer's efforts have been undertaken as part of a collaborative research project, referred to as the Research Project, with investigators at Columbia and Rockefeller Universities in New York. Support for the Research Project is being provided by a grant award to Columbia from the Foundation for the National Institutes of Health (FNIH) through the Grand Challenges in Global Health initiative, referred to as the Initiative, of the Bill & Melinda Gates Foundation. One of the goals of the Initiative is to improve the control of insects that affect human health, with the ultimate goal of eradication of malaria, Dengue fever and other insect borne diseases in the developing world.
Bayer will determine whether to develop further, for crop control applications, compounds identified in the course of the Research Project.
In connection with the Development Agreement, we have granted to Bayer certain exclusive rights to use our proprietary technology in the field of use of the Development Agreement (any use against invertebrate animals other than the prevention, diagnosis or treatment of human health conditions). Bayer will provide us with the opportunity to acquire a license in the field of use to further develop compounds identified by Bayer in the course of the Research Project, which Bayer determines not to further develop itself. Bayer has also granted to us an exclusive option, that expires five years from the end of the Project Term, as that term is defined below, to negotiate and execute a license from Bayer with respect to compounds identified by Bayer in the course of the Research Project, for use outside the field of use and outside the field of agriculture.
As part of the Development Agreement, Bayer paid us an upfront $500,000 license fee and has agreed to pay us additional amounts upon achieving certain milestones and royalties on any net sales of products developed pursuant to the Research Project. Consistent with the global access policy of the Initiative and the award agreement to Columbia from FNIH, the Development Agreement also provides for certain guidelines with respect to distribution and pricing of products for those most in need in disease endemic countries.
Total contractual payments relating to the exclusive license granted to Bayer, including the aforementioned $500,000 upfront license fee, are recognized as licensing fee revenue pro-rata over the expected two-year Project Term of the Development Agreement during which the Research Project will be undertaken (the "Project Term"), through September 15, 2012.
Critical Accounting Policies and Use of Estimates
The Company’s significant accounting policies are described in Note 3 to the Financial Statements. We believe that all of these involve the application of significant judgment and discretion by management and are therefore “critical” accounting policies. Several accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We base our estimates and judgments on historical experience, terms of existing contracts, observance of trends in the industry, information provided by outside sources and various other assumptions that we believe to be reasonable under the circumstances.
Results of Operations
General
Primarily due to the estimated revenues to be earned under the Development Agreement described below under the heading “Development Agreement”, entered into on August 31, 2010, management has determined that the Company has commenced its planned principal operations and was no longer considered a development stage company as of September 15, 2010. We have a limited operating history. We have generated only limited revenues from operations. All losses accumulated since the commencement of our business have been considered as part of our development stage activities.
Our financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course. During the six months ended June 30, 2011, funding was provided by proceeds of $230,000 principal amount of notes we received from investors, including related parties. During the six months ended June 30, 2011, we recognized revenues in the aggregate amount of $195,000 or six months of an estimated 24-month project, in connection with the Development Agreement.
Product Research and Development
We intend to continually review the commercial validity of the olfaction technology, in order to make the appropriate decisions as to the best way to allocate our limited resources. Other than the Development Agreement, we currently do not have any research and development grant applications outstanding nor can we predict whether we will receive any additional research and development funding during the next twelve (12) months. Other than amounts in connection with the Development Agreement, we are unable at this time to predict a level of spending, if any, for product research and development activities during the next twelve (12) months, all of which will be dependent upon the implementation of our business plan. Our Chief Executive Officer and Board of Directors have and intend to continue to seek opportunities with non-profit agencies and with potential commercial partners to leverage our olfaction intellectual property for the development of control agents for biting insects, in particular, insect vectors of malaria and other diseases.
Revenues
During the six months ended June 30, 2011, we realized revenues of $195,000, attributable to the Development Agreement, compared to no revenues during the six months ended June 30, 2010.
Operating Expenses
For the three months ended June 30, 2011, general and administrative costs were $217,932 compared to $93,316 for the three months ended June 30, 2010. The increase of $124,616 during the three months ended June 30, 2011 is primarily due to an increase in professional fees of $71,842, a decrease in travel expenses of $8,753, an increase in compensation and employee health insurance expense of $50,588 and a net increase in other miscellaneous expenses of $10,939.
For the six months ended June 30, 2011, general and administrative costs were $431,363 compared to $231,189 for the six months ended June 30, 2010. The increase of $200,174 during the six months ended June 30, 2011 is primarily due to an increase in professional fees of $100,882, a decrease in travel expenses of $28,162, an increase in compensation and employee health insurance expense of $34,471 and a net increase in other miscellaneous expenses of $92,983.
Amortization expense includes the amortization of our license and patent costs. For the three months ended June 30, 2011 and 2010, amortization expense was $0 and $11,499, respectively, and for the six months ended June 30, 2011 and 2010, amortization expense was $0 and $42,915, respectively. License and patent costs have been fully amortized as of June 30, 2011. The original value of the Columbia License of $440,625 reflects the closing share price of Sentigen’s common stock on April 10, 2000. The capitalized value of the patent costs of $119,700 mainly consists of legal and application fees.
Interest and financing expenses reflect the cost of our outstanding debt. For the three months ended June 30, 2011 and 2010, interest and financing expenses amounted to $21,176 and $796, respectively, and for the six months ended June 30, 2011 and 2010, interest amounted to $21,965 and $2,850, respectively.
Net Loss
As a result of the foregoing, we had a net loss of $141,595, or $0.01 per share, during the three months ended June 30, 2011, compared to a net loss of $105,610, or $0.01 per share, during the three months ended June 30, 2010, and for the six months ended June 30, 2011 and 2010, we had a net loss of $258,303, or $0.01 per share, and $276,952, or $0.02 per share, respectively.
Liquidity and Capital Resources
Our financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities. We have incurred operating losses since inception. As of June 30, 2011, we had $164,849 in cash and cash equivalents, compared to $171,854 at December 31, 2010. At June 30, 2011, we had a working capital deficiency of $293,175, compared to a working capital deficiency of $412,446 at December 31, 2010. Net cash used in operating activities for the six months ended June 30, 2011 was $237,005, compared to $134,070 for the six months ended June 30, 2010, an increase of $102,935.
As previously reported, on April 12, 2010, we issued to each of four individuals $20,000 principal amount of promissory notes (referred to as the April 2010 Notes, (a total of $80,000 principal amount of April 2010 Notes). The investors included Joseph Pagano, the Company’s Chief Executive Officer, Secretary, Treasurer and Chairman of the Board of Directors, Frederick R. Adler, a director of the Company and a beneficial owner of more than 10% of the Company’s outstanding common stock and Samuel A. Rozzi, a beneficial owner of more than 10% of the Company’s outstanding common stock, and one individual, referred to collectively as the Holders). Additionally, as previously reported, on September 7, 2010, we issued to each of Messrs. Rozzi and Adler, $25,000 principal amount of promissory notes, referred to as the September 2010 Notes, (a total of $50,000 principal amount of September 2010 Notes), and on August 12, 2010, we issued to Mr. Pagano $20,000 principal amount of a promissory note, referred to as the August 2010 Note.
On April 19, 2011, we and the Holders entered into an exchange agreement pursuant to which we raised $230,000 in additional funds from the Holders as follows: in exchange for the April 2010 Notes, the August 2010 Note and the September 2010 Notes, in the aggregate principal amount of $150,000, and $230,000 in cash, we issued to each Holder $95,000 principal amount in a promissory note (an aggregate principal amount of $380,000) (referred to as the April 2011 Notes), and a warrant, referred to as the April 2011 Warrants, collectively, or the April 2011 Warrant, individually, to purchase 463,415 shares of Common Stock, $0.0001 par value, at a purchase price of $0.41 per share.
The April 2011 Notes accrue interest at a rate of six percent per annum, which interest is payable quarterly until April 19, 2014, at which time the outstanding principal amount, with interest accrued thereon, will be due and payable. The April 2011 Notes will become due and payable upon customary events of default or if we consummate an equity financing resulting in net proceeds of $4,000,000 or more to us.
Each April 2011 Warrant is exercisable, in whole or in part, during the period from April 19, 2011 to April 19, 2016.
We believe that we have enough working capital to fund operations through the year ending December 31, 2011.
Our ability to obtain financing and realize revenue depends upon the status of future business prospects, as well as conditions prevailing in the capital markets. These factors, among others, raise substantial doubt about our ability to continue as a going concern should we be unable to realize revenues from our olfaction technology or raise sufficient additional funds in the future. If we are unable to raise such funds, we may need to cease our operations. Additionally, if we raise additional funds by issuing equity securities, our then-existing stockholders will likely experience dilution, depending upon the terms and conditions of such financing.
Off-Balance-Sheet Arrangements
As of June 30, 2011, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.
Inflation
Periods of high inflation could have a material adverse impact on us to the extent that increased borrowing costs for floating rate debt (if any) may not be offset by increases in cash flow. At June 30, 2011, we had $0 in floating rate debt outstanding. There was no significant impact on our operations as a result of inflation during the six-month period ended June 30, 2011.
Recent Accounting Pronouncements
See Note 3 to the financial statements included in Part I, Item 1 of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
As of June 30, 2011, Mr. Joseph K. Pagano, who is our Chief Executive Officer, Secretary and Treasurer (and principal financial officer) evaluated the effectiveness of our "disclosure controls and procedures" as defined in Rules 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 ("Disclosure Controls"). Based upon this evaluation, Mr. Pagano concluded that the Disclosure Controls were effective, as of the date of his evaluation, in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that any information relating to us that is required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive/financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended June 30, 2011, there were no changes in our "internal control over financial reporting" as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934 (“Internal Control”), that have materially affected or are reasonably likely to materially affect our Internal Control.
PART II- OTHER INFORMATION
Item 6. Exhibits.
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Exhibit
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Description
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10.1
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Promissory Note dated April 19, 2011 made by SentiSearch, Inc. in favor of Joseph Pagano
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10.2
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Promissory Note dated April 19, 2011 made by SentiSearch, Inc. in favor of Frederick Adler
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10.3
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Promissory Note dated April 19, 2011 made by SentiSearch, Inc. in favor of Samuel Rozzi
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10.4
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Promissory Note dated April 19, 2011 made by SentiSearch, Inc. in favor of Rosalind Davidowitz
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10.5
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Warrant dated April 19, 2011 issued by SentiSearch, Inc. to Joseph Pagano
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10.6
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Warrant dated April 19, 2011 issued by SentiSearch, Inc. to Frederick Adler
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10.7
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Warrant dated April 19, 2011 issued by SentiSearch, Inc. to Samuel Rozzi
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10.8
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Warrant dated April 19, 2011 issued by SentiSearch, Inc. to Rosalind Davidowitz
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10.9
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Exchange Agreement dated April 19, 2011 by and among SentiSearch, Inc., Joseph Pagano, Frederick Adler, Samuel Rozzi and Rosalind Davidowitz
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31
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Certification of Chief Executive Officer and principal financial officer pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.
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32
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Certification of Chief Executive Officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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.
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SENTISEARCH, INC.
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/s/ Joseph K. Pagano
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Joseph K. Pagano, Chief Executive Officer and
Treasurer (principal executive and financial officer)
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EXHIBIT INDEX
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Exhibit
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Description
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10.1
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Promissory Note dated April 19, 2011 made by SentiSearch, Inc. in favor of Joseph Pagano
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10.2
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Promissory Note dated April 19, 2011 made by SentiSearch, Inc. in favor of Frederick Adler
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10.3
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Promissory Note dated April 19, 2011 made by SentiSearch, Inc. in favor of Samuel Rozzi
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|
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10.4
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Promissory Note dated April 19, 2011 made by SentiSearch, Inc. in favor of Rosalind Davidowitz
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10.5
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Warrant dated April 19, 2011 issued by SentiSearch, Inc. to Joseph Pagano
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10.6
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Warrant dated April 19, 2011 issued by SentiSearch, Inc. to Frederick Adler
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10.7
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Warrant dated April 19, 2011 issued by SentiSearch, Inc. to Samuel Rozzi
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10.8
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Warrant dated April 19, 2011 issued by SentiSearch, Inc. to Rosalind Davidowitz
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10.9
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Exchange Agreement dated April 19, 2011 by and among SentiSearch, Inc., Joseph Pagano, Frederick Adler, Samuel Rozzi and Rosalind Davidowitz
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31
|
|
Certification of Chief Executive Officer and principal financial officer pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.
|
|
|
|
|
|
32
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|
Certification of Chief Executive Officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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