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EX-32.2 - SARBANES-OXLEY 906 CERTIFICATION - CHIEF FINANCIAL OFFICER. - Ceelox Inc.exh32-2.htm
EX-31.2 - SARBANES-OXLEY 302 CERTIFICATION - PRINCIPAL FINANCIAL OFFICER. - Ceelox Inc.exh31-2.htm
EX-31.1 - SARBANES-OXLEY 302 CERTIFICATION - PRINCIPAL EXECUTIVE OFFICER. - Ceelox Inc.exh31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - Ceelox Inc.Financial_Report.xls
EX-32.1 - SARBANES-OXLEY 906 CERTIFICATION - CHIEF EXECUTIVE OFFICER. - Ceelox Inc.exh32-1.htm







UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]
QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
   
OR
 
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number   000-1421766

CEELOX, INC.
(Exact name of registrant as specified in its charter)

NEVADA
(State or other jurisdiction of incorporation or organization)

10801 Mastin, Suite 920, Bldg # 8, Overland Park, Kansas 66210
 (Address of principal executive offices, including zip code.)

(813) 769-0918
(telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.   YES [X]   NO [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES [  ]   NO [X]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large Accelerated Filer
[   ]
 
Accelerated Filer
[   ]
 
Non-accelerated Filer
[   ]
 
Smaller Reporting Company
[X]
 
(Do not check if a smaller reporting company)

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 11,647,556 as of November 18, 2011.



 

 

 
 

 


PART I – FINANCIAL INFORMATION

ITEM 1.                      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

CEELOX, INC. and SUBSIDIARY
September 30, 2011

 
Page
   
PART I.
 
   
Item 1.
Condensed Consolidated Financial Statements.
 
     
   
Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010
F-1
   
Statements of Operations for the nine months ended September 30, 2011 and 2010 (Unaudited)
F-2
   
Statements of Operations for the three months ended September 30, 2011 and 2010 (Unaudited)
F-3
   
Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (Unaudited)
F-4
   
Notes to Condensed Financial Statements (Unaudited)
F-5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
20
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
23
     
Item 4.
Controls and Procedures.
23
     
PART II.
 
     
Item 1A.
Risk Factors.
24
     
Item 6.
Exhibits.
24
     
Signatures
25
   
Exhibit Index
26














-2-

 
 

 

CEELOX, INC. and SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS


   
September 30,
   
December 31,
   
2011
   
2010
   
Unaudited
   
Audited
           
ASSETS
         
Current assets:
         
Cash
$
 -
 
$
 25,729
Accounts receivable
 
1,920
   
 7,206
Inventory
 
 -
   
 35,674
Prepaids and other current assets
 
 35,650
   
 43,497
Total current assets
 
 37,570
   
 112,106
           
Property and equipment, net
 
 -
   
 11,904
Software development costs, patents and trademarks, net
 
 88,627
   
 100,813
Total assets
$
 126,197
 
$
 224,823
           
LIABILITIES
         
Current liabilities:
         
Accounts payable and accrued liabilities
$
 366,119
 
$
 368,307
Advances, related party—in default
 
 7,833,128
   
 7,351,188
Notes payable, related party—in default
 
 553,697
   
 -
Convertible notes payable, related party—in default
 
 940,819
   
 885,620
Convertible note – bridge loans
 
 323,393
   
 296,415
Total current liabilities
 
 10,017,156
   
 8,901,530
           
           
Commitments and contingencies
         
           
STOCKHOLDERS' DEFICIT
         
Preferred stock, $0.0001 par value; 5,000,000 undesignated shares,
         
authorized; none issued and outstanding
 
-
   
-
           
Common stock, $0.00001 par value: Authorized 100,000,000 shares;
         
Issued:  11,647,556 shares as of September 30, 2011and 11,383,673
         
shares as of December 31, 2010; Outstanding: 11,647,556 at
         
September 30, 2011 and 11,383,673 at December 31, 2010
 
 117
   
 114
Additional paid-in capital
 
 15,802,119
   
 15,594,014
Accumulated deficit
 
 (25,350,255)
   
 (23,975,687)
Non-controlling interests
 
 (342,940)
   
 (295,148)
Total stockholders’ deficit
 
 (9,890,959)
   
 (8,676,707)
Total liabilities and stockholders’ deficit
$
 126,197
 
$
 224,823






See Notes to Condensed Consolidated Financial Statements
F-1

 
 

 

CEELOX, INC. and SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


   
For the Nine Months Ended
   
September 30,
   
September 30,
   
2011
   
2010
           
Revenue:
         
Hardware and software
$
 1,374
 
$
 9,337
Licensing
 
 19,727
   
 14,605
Contract revenue
 
-
   
-
Total Revenue
 
 21,101
   
 23,942
           
           
Operating costs and expenses:
         
Costs of hardware sales
 
 5,130
   
 13,750
Marketing, general and administrative
 
 1,117,076
   
 1,909,065
Depreciation and amortization
 
 15,412
   
 18,650
Loss on disposal of assets
 
45,168
   
-
Total costs and expenses
 
 1,182,786
   
 1,941,465
           
Operating loss
 
 (1,161,685)
   
 (1,917,523)
           
Other income (expenses):
         
Interest and amortization of financing fees
 
 (260,675)
   
 (418,151)
Other income
 
-
   
-
Total other income (expenses)
 
 (260,675)
   
 (418,151)
           
Net loss
$
 (1,422,360)
 
$
 (2,335,674)
           
Less: Net loss attributable to non-controlling interest
 
 47,792
   
 80,884
           
Net loss attributable to common stockholders
$
 (1,374,568)
 
$
 (2,254,790)
           
Basic and diluted loss per share
$
 (0.12)
 
$
 (0.20)
           
Weighted average shares basic and diluted
 
 11,633,139
   
 11,168,224
           
Stock-based compensation:
         
Payroll and related benefits
$
 13,483
 
$
 122,269
           
Consulting
$
 52,125
 
$
 279,513
           
Legal Fees
$
 80,000
 
$
-




See Notes to Condensed Consolidated Financial Statements
F-2

 
 

 

CEELOX, INC. and SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


   
For the Three Months Ended
   
September 30,
   
September 30,
   
2011
   
2010
           
Revenue:
         
Hardware and software
$
-
 
$
-
Licensing
 
 9,725
   
 7,573
Contract revenue
 
-
   
-
Total Revenue
 
 9,725
   
 7,573
           
           
Operating costs and expenses:
         
Costs of hardware sales
 
 1,420
   
2,010
Marketing, general and administrative
 
 87,855
   
 701,440
Depreciation and amortization
 
 4,349
   
 5,632
Loss on disposal of assets
 
 45,168
   
-
Total costs and expenses
 
138,792
   
709,082
           
Operating loss
 
(129,067)
   
(701,509)
           
Other income (expenses):
         
Interest and amortization of financing fees
 
(48,054)
   
(116,261)
Other income
 
-
   
-
Total other income (expenses)
 
(48,054)
   
(116,261)
           
Net loss
$
(177,121)
 
$
(817,770)
           
Less: Net loss attributable to non-controlling interest
 
5,476
   
34,018
           
Net loss attributable to common stockholders
$
(171,645)
 
$
(783,752)
           
Basic and diluted loss per share
$
(0.01)
 
$
(0.07)
           
Weighted average shares basic and diluted
 
11,647,556
   
11,381,515
           
Stock-based compensation:
         
Payroll and related benefits
$
1,231
 
$
845
           
Consulting
$
6,250
 
$
226,703
           
Legal Fees
$
-
 
$
-




See Notes to Condensed Consolidated Financial Statements
F-3

 
 

 

CEELOX, INC. and SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


   
For the Nine Months Ended
   
September 30,
   
2011
   
2010
           
CASH FLOWS FROM OPERATING ACTIVITIES:
         
Net loss:
$
 (1,422,360)
 
$
 (2,335,674)
Adjustments to reconcile net loss to net cash used in operating activities:
         
Bad debt expense
 
-
   
 7,145
Stock compensation expense to consultants and employees
 
 145,608
   
 348,972
Amortization of deferred finance fees
 
 -
   
 4,729
Depreciation and amortization
 
 15,412
   
 18,650
Loss on disposal of assets
 
45,168
   
-
Effect on cash of changes in operating assets and liabilities:
         
Accounts receivable
 
 5,286
   
 8,668
Inventory
 
(817)
   
 3,692
Prepaids and other current assets
 
7,847
   
 (44,652)
Accounts payable and accrued liabilities
 
309,698
   
 504,574
NET CASH USED IN OPERATING ACTIVITIES
 
 (894,158)
   
 (1,483,896)
           
CASH FLOWS FROM INVESTING ACTIVITIES:
         
Purchase of property and equipment
 
-
   
 (1,132)
NET CASH USED IN INVESTING ACTIVITIES
 
-
   
 (1,132)
           
CASH FLOW FROM FINANCING ACTIVITIES:
         
Proceeds from convertible notes payable, related party
 
-
   
 100,000
Advances from related party
 
 385,552
   
1,237,824
Proceeds from notes payable, related party
 
 482,877
   
-
Proceeds from issuance of convertible note – bridge loans
 
-
   
  60,000
NET CASH PROVIDED BY FINANCING ACTIVITIES
 
 868,429
   
 1,397,824
           
NET INCREASE (DECREASE) IN CASH
         
CASH:
 
 (25,729)
   
 (87,204)
Beginning of period
 
 25,729
   
  125,141
End of period
$
-
 
$
 37,937
           
Supplemental disclosure of non-cash investing and financing activities:
         
           
Conversion of notes payable, related party and bridge loans into common stock
$
-
 
$
 353,476
Issuance of convertible notes payable, related party in exchange for share purchase and stockholder advances
$
-
 
$
 450,000
Advance – Expenses paid by related party
$
 70,000
 
$
-


See Notes to Condensed Consolidated Financial Statements
F-4

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

1. Nature of Business and Recapitalization Transaction

Ceelox, Inc. (the “Company”) (formerly Nicaragua Rising, Inc. or “Nicaragua”) was incorporated on October 24, 2007 in Nevada. The Company was a Development Stage Company until the occurrence of the following recapitalization transaction. On February 12, 2010, (the “Merger Date”), pursuant to the share exchange agreement between Ceelox Private (defined below), certain stockholders of Ceelox Private, the Company and the Company’s majority stockholder, the Company exchanged 1 share of the Company’s common stock for every 9 shares of Ceelox Private common stock (the “Merger”).  As a result of the Merger, Ceelox Private became a majority-owned subsidiary of the Company.  See Note 8 for a more detailed discussion of the Nicaragua-Ceelox Private Share Exchange.
 
The Company’s majority-owned subsidiary Ceelox, Inc. (“Ceelox Private”) was incorporated in the State of Florida and commenced operations on September 17, 2003.  Through the Company’s majority-owned subsidiary, the Company offers software solutions and devices that deliver biometric identity-based user access authentication, verification, and data and email encryption.  The Company’s biometric authentication provides protection against identity theft, and our solutions also meet regulatory requirements for two-factor authentication.

Prior to the above transaction, on November 5, 2009, the majority beneficial owner of Ceelox Private acquired 11,091,000 shares of the Company’s common stock, representing 98.5% of the issued and outstanding common stock. The net assets of Ceelox Private and the Company were combined at their respective net asset value on February 12, 2010 and no goodwill was recorded as a result of the Merger.

The Company formally changed its name from Nicaragua Rising, Inc. to Ceelox, Inc., a Nevada Corporation, on September 30, 2010.

2.      Going Concern and Management’s Plans

During the nine and three months ended September 30, 2011 and 2010, the Company was engaged in advertising and marketing activities directed at generating interest in its fully developed products.  As indicated in the accompanying condensed consolidated financial statements, at September 30, 2011 and December 31, 2010, the Company had $0 and $25,729 in cash, respectively, and $9,979,586 and $8,789,424 in negative working capital, respectively.  For the nine months ended September 30, 2011 and 2010, the Company had a net loss of $(1,422,360) and $(2,335,674), respectively, and utilized  $894,376 and $1,483,896 , respectively, in cash from operations.  For the three months ended September 30, 2011 and 2010, the Company had a net loss of $(177,121) and $(817,770), respectively.  These factors, among others, indicate that the Company is in need of additional financing in order to continue its planned activities for the year that began on January 1, 2011.   No adjustment has been made in the accompanying condensed consolidated financial statements to the amounts and classification of assets and liabilities which could result should the Company be unable to continue as a going concern.

The Company continues to be dependent upon cash receipts from debt and equity financing from third parties and the funding from CIP, LLC (“CIP”), a related party.  However, remaining cash reserves from these activities are insufficient to sustain the Company’s operations until substantial revenue production can be achieved, which is not currently projected for the near term.  As a result, management continues to curtail operating activities, and minimized cash outflows.  Management’s plans to sustain its operations rely on the continuing financial support from the Related Party and the sale of common stock in private placement or public transactions.  There can be no assurances that the Related Party will continue to fund the working capital requirements of the Company or that the sale of common stock in private or public placement transactions will result in sufficient cash to fund operations at current levels, if any.


F-5

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

2.      Going Concern and Management’s Plans (continued)

As more fully discussed in Note 4, the Company granted CIP, an exclusive, fully paid-up, royalty-free, irrevocable, perpetual, worldwide, transferable, assignable license, with the right to sublicense in and to all of the Company’s intellectual property. Additionally and in connection with the License Agreement, the Company entered into a Software Services Agreement with CIP, whereby CIP agreed to pay the Company’s costs associated with marketing its products and maintaining and developing the Company’s products based on its biweekly cash burn rate, net of sales collections. Any amount of revenues in excess of expenses generated by the Company would be for the benefit of CIP. Either party could terminate the agreement whereby the intellectual property assigned to CIP would revert back to the Company in consideration of all previous monies advanced to the Company plus reassignment consideration, (approximately $7.8 million at September 30, 2011). Pursuant to a License Reacquisition Letter Agreement entered into on February 12, 2010, CIP agreed to assign its rights in the License Agreement and Software Services Agreement to the Company in exchange for the issuance of 14,520,865 shares of common stock to CIP at such time as CIP determines in its sole discretion that adequate financing to support the Company's business will be obtained from an unrelated third party.  

As previously reported on Form 8-K dated July 13, 2011 and subsequently amended on August 9, 2011, the Company reported that it received a demand letter (“Demand Letter”) from its primary creditor and majority stockholder, CIP.

The Demand Letter requires the Company to either (i) make payment in full of all amounts owed to CIP by Ceelox Sub under that certain 8% Convertible Promissory Note dated August 17, 2005 in the original principal amount of $500,000 (as subsequently amended from time to time, the “Note”) or (ii) deliver title to all of the assets of Ceelox that secure the Note (the “Collateral”) to CIP, in either event on or before August 12, 2011.  The current amount due under the Note is approximately $444,540 (which includes $300,705 in principal and approximately $144,000 of interest as of the date of the Demand Letter), and in addition to the obligations to CIP under the Note, Ceelox Sub has other contractual obligations to CIP that, if CIP so elected, would require an immediate payment from Ceelox Sub to CIP of approximately $7,986,000, including accrued interest.

The Demand Letter further states that if Ceelox Sub agrees to deliver title to all of the Collateral to CIP on or before August 12, 2011, CIP will agree that (i) all indebtedness under the Note will be deemed satisfied and (ii) all other contractual agreements between CIP and Ceelox Sub will be terminated and any amounts due thereunder will be written off by CIP.

On August 3, 2011, CIP, the Company’s majority stockholder executed a majority stockholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on August 12, 2011 in exchange for CIP’s agreement to forgive all amounts due under the Note and all other amounts due to CIP by Ceelox Sub.

This action will result in the termination of (i) that certain License Agreement dated July 20, 2007 between CIP and Ceelox Sub and (ii) that certain Exclusive Software Development Maintenance and Marketing Services Agreement dated July 20, 2007 between CIP and Ceelox Sub.

In connection with the stockholder consent, Ceelox Sub has agreed to execute and return certain documents that accompanied the Demand Letter on or before August 12, 2011, including the following: (i)Termination, Settlement and Full Release, (ii) Omnibus Bill of Sale and Assignment and (iii) Global Assignment of Intellectual Property Rights, (collectively, the “Settlement Agreements”).


F-6

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

2.      Going Concern and Management’s Plans (continued)

The result of Ceelox Sub entering into the Settlement Agreements will result in the Company ceasing its operations.  However, as of the date of this filing Ceelox Sub has not executed the Settlement Agreements and will not execute such agreements until the Company as its majority shareholder provides its approval thereof.  The Company continues to develop and sell its products, seek funding from third parties and explore strategic relationships.  Furthermore, CIP has agreed not to enforce its demand letter while the Company continues to develop and sell its products, pursue funding and seek to enter into a strategic relationship with a third party.  There can be no assurance that CIP will not seek to enforce its demand at any time after the date hereof.  Additionally, there can be no assurance that the Company will be able to raise additional capital, continue to sell its products or enter into a strategic relationship with a third party in a timely fashion if at all.

Leased Space

Until July 31, 2011, the Company’s offices were located at 13976 Lynmar Blvd., Tampa, FL 33626 where the Company leased approximately 7,000 square feet of office space.  Pursuant to the lease, the monthly rent is $6,710, and as of September 30, 2011, the Company owes $44,937 in deferred payments. After July 31, 2011, the Company did not renew the lease agreement at 13976 Lynmar Blvd, Tampa, Florida 33626, and the Company’s office is now located at 10801 Mastin, Suite 920, Bldg # 8, Overland Park, Kansas 66210.

Employee Furlough

During the month of July the Company furloughed all remaining employees with the exception of the Chief Executive Officer and the Chief Operating Officer.  The Company may bring back certain employees if new funding is secured and/or the Company enters into a strategic transaction.  Although the Company furloughed substantially all its employees, the Company continues to sell and develop its products and pursue funding and/or a strategic transaction with a third party.

3. Basis of Presentation and Selected Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these statements do not include all of the information required by generally accepted accounting principles for annual financial statements. In the opinion of management, all known adjustments (consisting of normal recurring accruals and reserves) necessary to present fairly the financial position, results of operations and cash flows as of and for the interim periods have been included. It is suggested that these condensed consolidated interim financial statements be read in conjunction with the consolidated financial statements and related notes in the Company’s Form 10-K for the year ended December 31, 2010.

The operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

Certain amounts in the September 30, 2010 condensed consolidated interim financial statements and disclosures have been reclassified to conform to the current year presentation.

F-7

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

3. Basis of Presentation and Selected Significant Accounting Policies (continued)

Principles of Consolidation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the SEC’s accounting rules under Regulation S-X. All material inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates
 
The preparation of condensed consolidated interim financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from those estimates.

Fair Value of Financial Instruments

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under Financial Accounting Standards Board (FASB) guidance regarding disclosures about fair value of financial instruments, approximate the carrying amounts presented in the accompanying consolidated balance sheets.

Computation of (Loss) Per Share

A basic earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares outstanding during the period.  A diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and potentially dilutive securities outstanding during the period.  Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, warrants and shares issuable upon the conversion of convertible notes.  The dilutive effect of the convertible notes is calculated under the if-converted method.  The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method.  This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instruments were exercised and the amount of unrecognized stock-based compensation related to future services.  No potential dilutive common shares are included in the computation of any diluted per share amount when a loss is reported.  Accordingly, we did not include 25,323,333 and 22,932,707 of potentially dilutive options, warrants and convertible debt instruments at September 30, 2011 and 2010 respectively.

 
For the Nine Months Ended
 
 2011
 
 2010
Potentially dilutive options
 2,283,377
 
 2,080,633
Potentially dilutive warrants
 6,254,783
 
 6,304,783
Potentially dilutive convertible instruments
 16,785,173
 
 14,547,291
 
 25,323,333
 
 22,932,707

Recently Issued Accounting Standards

Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s condensed consolidated financial statements.


F-8

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

3. Basis of Presentation and Selected Significant Accounting Policies (continued)

Inventory

Inventories consist of computer equipment merchandise that is in its finished form and ready for sale to end-user companies.

4.      Advances from Related Party

On July 20, 2007 the Company granted CIP an exclusive, fully paid-up, royalty-free, irrevocable, perpetual, worldwide, transferable, assignable, license, with the right to sublicense in and to all the Companies intellectual property (the “License Agreement”).  Subject to the License Agreement the Company maintains all of its right, title and interest in and to the intellectual property.  The License Agreement was effective immediately and continues indefinitely, unless and until terminated by mutual agreement.  Additionally and in connection with this agreement, the Company entered into a Software Services Agreement with the related party whereby they agreed to pay the Company costs associated with marketing its products and maintaining and developing our products based on our biweekly cash burn rate, net of sales collections.

The agreements contain a provision allowing for the reassignment of the intellectual property back to the Company at both the option of the Company and the affiliate, each option independent of the other.  Under these options the Company may reacquire all its rights granted in the exclusive license agreement above for an amount equal to the total costs paid under this agreement plus 25 percent in cash or in common equity at a conversion rate of $0.50625 (“Reacquisition Fee”).  On February 12, 2010, CIP agreed to transfer, under certain conditions, the licensing and software services agreement to Nicaragua Rising, Inc. in consideration of 14,520,865 shares. See Note 2.

During the nine months ended September 30, 2011 and 2010, the Company received advances under this agreement of $385,552 and $1,237,827 , respectively. Interest accrued for the nine months ended September 30, 2011 and 2010 amounted to $96,388 and $309,457 , respectively.

Total advances including the reacquisition fee, which is being treated as interest expense, amounted to $7,833,128 and $7,351,188 as of September 30, 2011 and December 31, 2010, respectively.

As previously reported on Form 8-K dated July 13, 2011 and subsequently amended on August 9, 2011, the Company reported that it received a demand letter (“Demand Letter”) from its primary creditor and majority stockholder, CIP, which requires the Company to either (i) make payment in full of all amounts owed to CIP by Ceelox Sub under the $300,705 Face Value Convertible Notes Payable – Related Party plus accrued interest (See Note 5) or (ii) deliver title to all of the assets of Ceelox that secure the Note (the “Collateral”) to CIP, in either event on or before August 12, 2011.  Additionally, if CIP so elects, it could require immediate payment from Ceelox Sub related to the outstanding related party advances plus accrued interest.  As mentioned in Note 2, CIP has agreed not to enforce its demand letter while the Company continues to develop and sell its products, pursue funding and seek to enter into a strategic relationship with a third party.  However, as of September 30, 2011, the Advances from Related Party are considered in default.






F-9

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

5.      Convertible Notes Payable - Related Party

On June 14, 2007, the Company entered into a convertible note agreement in the amount of $300,705. Under this agreement, the instrument was convertible into common stock at a conversion rate of $1.35. As of September 30, 2011, the debt was convertible into 329,289 shares of common stock and had a carrying value of 444,540. Interest expense for the nine months ended September 30, 2011 and 2010 amounted to $33,860 and $28,618 , respectively. The Company is in default of this agreement.

On February 10, 2010, the Company entered into a convertible note with a related party in the amount of $350,000 in exchange for 9,916,000 of common stock held by the related party. Simultaneously, the related party cancelled an additional 1,175,101 shares for no consideration. The note has a term of one year and accrues interest at 8% per annum. The note is convertible into common stock at $0.81 per share. Under this agreement, the note is convertible into 476,537 shares of common stock at September 30, 2011 and had a carrying value of $385,995 . Interest expense for the nine months ended September 30, 2011 and 2010 amounted to $16,597 and $14,027 , respectively.  On February 12, 2011 the term of the note was modified from February 10, 2011 to ‘on demand by the holder’.

On February 10, 2010, the Company converted a related party advance into a convertible note in the amount of $100,000. The note has a term of one year and accrues interest at 8% per annum. The note is convertible into common stock at $0.81 per share. Under this agreement, the note is convertible into 136,154 shares of common stock at September 30, 2011 and had a carrying value of $110,284 . Interest expense for the nine months ended September 30, 2011 and 2010 amounted to $4,742 and $4,008 , respectively.  On February 12, 2011 the term of the note was modified from February 10, 2011 to ‘on demand by the holder’.

At September 30, 2011and December 31, 2010, the carrying value of convertible notes payable due to related parties consisted of the following:

 
Principal
Accrued
Interest
Balance
Balance December 31, 2010
$
 750,705
$
 134,915
$
 885,620
Interest accrued September 30, 2011
 
-
 
 55,199
 
 55,199
Balance September 30, 2011
$
 750,705
$
 190,114
$
 940,819

As previously reported on Form 8-K dated July 13, 2011 and subsequently amended on August 9, 2011, the Company reported that it received a demand letter (“Demand Letter”) from its primary creditor and majority stockholder, CIP, which requires the Company to either (i) make payment in full of all amounts owed to CIP by Ceelox Sub under the $300,705 Face Value Convertible Notes Payable – Related Party plus accrued interest or (ii) deliver title to all of the assets of Ceelox that secure the Note (the “Collateral”) to CIP, in either event on or before August 12, 2011.  Additionally, if CIP so elects, it could require immediate payment from Ceelox Sub related to the $100,000 and $350,000 Face Value Convertible Notes Payable – Related Party plus accrued interest.  As mentioned in Note 3, CIP has agreed not to enforce its demand letter while the Company continues to develop and sell its products, pursue funding and seek to enter into a strategic relationship with a third party.  However, as of September 30, 2011, the Convertible Notes Payable – Related Party are considered in default.




F-10

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

6.      Convertible Notes Payable – Bridge Loans

In August of 2009 the Ceelox Private entered in to a convertible note subscription agreement with certain accredited investors.  The offering was for $1.5 million in convertible notes and common stock purchase warrants.

The notes are due and payable upon the earlier of:

1.
Two years from the date of issuance
2.
The date of completion, by Ceelox Private, of a transaction pursuant to which it becomes a majority-owned subsidiary of a publicly-traded company along with a simultaneous financing in the minimum amount of $1,500,000 (for purposes hereof this shall be referred to as a “Reverse Merger”), or
3.
The date on which Ceelox Private is acquired in a non-Reverse Merger transaction whereby a non-affiliated third-party acquires 50% or more of Ceelox Private’s capital stock (“Third-Party Acquisition”).

Purchasers in this offering are granted warrants to purchase that number of shares of Common Stock equal to the principal amount of their note divided by the applicable conversion price of the notes as described above and the exercise price per share shall be equal to the conversion price of the notes. Upon the Merger, 777,451 of warrants were issuable under this agreement.

Ceelox Private had issued $435,000 of notes under this subscription agreement through December 31, 2009 and an additional $60,000 through December 31, 2010. In February 2010, the Company exchanged a non interest bearing stockholder advance payable for a convertible bridge loan in the amount of $134,735. Ceelox Private determined that, based upon the contractual terms of the agreement, the maximum number of warrants to be issued, in aggregate, would be 1,166,176 and has calculated a gross discount at inception in the amount of $58,064 ($17,739 of discounts recorded during the period for new issuances) and is amortizing this amount on a straight line basis over the term of the agreements.  Ceelox Private considered the guidance under ASC 815 in evaluation of whether an embedded feature is considered indexed to a Company’s own stock.  Ceelox Private determined that the guidance did not apply and the debt did qualify as conventional convertible debt.

During the year ended December 31, 2010, holders of notes with a face value totaling $345,000 converted the face value plus accrued interest of $8,476 into 436,391 post merger common shares. Unamortized discounts of $25,069 were charged to interest expense upon conversion.  Additionally, during the nine and twelve months ended September 30, 2011 and December 31, 2010, the Ceelox Private recorded amortization of discounts in the amount of $30,286 and $20,582 related to unconverted instruments, respectively. As of September 30, 2011 and December 31, 2010, the carrying amounts of convertible bridge notes were $323,393 , net of $2,709 in un-amortized discount and $296,415 , net of $12,413 in un-amortized discount, respectively.

7.      Notes Payable - Related Party

On March 31, 2011, Ceelox issued a promissory note to a related party in the amount of $110,000. The note is payable on demand and has an interest rate of 0.55%. The note was given in exchange for funds advanced to the Company to pay fees related to various consulting agreements. Interest expense for the nine months ended September 30, 2011 amounted to $308.

On June 30, 2011, Ceelox issued a promissory note to a related party in the amount of $364,791. The note is payable on demand and has an interest rate of 0.55%. The note was given in exchange for funds advanced to the Company to pay fees related to various consulting agreements. Interest expense for the nine months ended September 30, 2011 amounted to $513.
F-11

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

7.      Notes Payable - Related Party (continued)

On September 30, 2011, Ceelox issued a promissory note to a related party in the amount of $78,086. The note is payable on demand and has an interest rate of 0.55%. The note was given in exchange for funds advanced to the Company to pay fees related to various consulting agreements. No interest had accrued at September 30, 2011.

As previously reported on Form 8-K dated July 13, 2011 and subsequently amended on August 9, 2011, the Company reported that it received a demand letter (“Demand Letter”) from its primary creditor and majority stockholder, CIP, which requires the Company to either (i) make payment in full of all amounts owed to CIP by Ceelox Sub under the $300,705 Face Value Convertible Notes Payable – Related Party plus accrued interest or (ii) deliver title to all of the assets of Ceelox that secure the Note (the “Collateral”) to CIP, in either event on or before August 12, 2011.  Additionally, if CIP so elects, it could require immediate payment from Ceelox Sub related to the $110,000, $364,791 and $78,086 Face Value Notes Payable – Related Party plus accrued interest.  As mentioned in Note 2, CIP has agreed not to enforce its demand letter while the Company continues to develop and sell its products, pursue funding and seek to enter into a strategic relationship with a third party.  However, as of September 30, 2011, the Notes Payable – Related Party are considered in default.

8.      Recapitalization and Equity Activity

Warrants
 
The Company had outstanding warrants at September 30, 2011 totaling 6,254,783 , retroactively restated to reflect the effects of the Company’s recapitalization and reverse merger.  The warrants expire at various dates ranging from October 1, 2012 through February 11, 2015 and have an average exercise price of $0.16.

Nicaragua-Ceelox Private Share Exchange

On February 12, 2010 (the “Merger Date”), pursuant to the share exchange agreement between Ceelox Private and the Company, certain stockholders of Ceelox Private participated in the share exchange agreement whereby 1 share of the Company’s common stock was exchanged for every 9 shares of Ceelox Private common stock (the “Merger”).  As a result of the Merger, Ceelox Private became a majority-owned subsidiary of the Company.  The historical financial statements of Ceelox Private for periods prior to this transaction are considered to be the historical financial statements of the combined entities as the substance of the transaction is a reverse merger or recapitalization of Ceelox Private with and into the Company, which was deemed to be a shell company.  Ceelox Private is the accounting acquirer as its stockholders obtained control of the combined entities as a result of the Merger.

In connection with the recapitalization transaction, Ceelox Private retired 121,111 shares of its Treasury Stock.  In addition, the Company recorded non-controlling interest in the initial amount of $192,243 related to 385,635 shares of Ceelox Private common stock not participating in the Nicaragua-Ceelox Private Share Exchange.

Simultaneously with the Share Exchange, the Company and its majority beneficial stockholder agreed to cancel 1,175,101 of the 11,091,101 Nicaragua shares purchased by the Company and exchange 9,916,000 shares of Nicaragua common stock for consideration of a $350,000 convertible note (see Note 4).  The shares purchased by the Company were reissued with the recapitalization transaction.


F-12

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

8.      Recapitalization and Equity Activity (continued)

Consulting Agreement

On February 1, 2010, the Company entered into an agreement with a consultant to perform such investor relations, public relations and other similar services as may be reasonably requested by The Company.  Such services may include, but shall not be limited to: (i) the introduction and implementation of marketing programs and other resources to the Company, (ii) the identification of capable individuals who may be considered as potential board members and/or officers of the Company and (iii) the identification and pursuit of strategic alliances for the Company.  In consideration of services performed and to be performed by Consultant, the Company shall deliver the following to Consultant: (i) 55,556 shares of the Company’s common stock and (ii) an option to purchase 138,889 shares of the Company’s common stock with an exercise price of $.99 per share and a five (5) year term.  Such option shall be in such form and subject to such terms and conditions as are typical in stock options of similar nature and size. During the nine months ended September 30, 2011 and 2010, the Company recorded stock-based compensation of $0 and $24,685, respectively, related to this agreement.

Retained Search Agreement

On February 1, 2010, the Company engaged a retained executive search firm.  The Company agreed to a fee for service that is a cash and stock amount equal to a percentage of the hired executive’s first year on target earnings with a minimum total fee of $100,000.  Half of the fee will be paid in cash and half will be paid in the form of an immediate stock grant of 69,444 shares of the Company’s Common stock which was due on signing.  The Company does not expect the fee to exceed $100,000. During the nine months ended September 30, 2011 and 2010, the Company recorded stock-based compensation of $ 0 and $28,125 , respectively, related to this agreement.

Investment Banking Agreement

In July 2009, the Company entered into an agreement with a firm for investment banking and financial advisory services. As consideration for these services, pursuant to the Agreement, the Company (i) in partial consideration for all Advisory Services to be rendered under the Agreement, the Company issued the firm 1,342,130 shares of common stock on October 15, 2009 having a value of approximately $540,000, (ii) a non-refundable due diligence review fee of $45,000 and 12 consecutive monthly payments of $15,000 (iii) an advisory fee of 7% of the total gross consideration of cash, equity, debt or property attributed to a business combination or any financing obtained through the advisory firm.  This agreement was further amended on February 12, 2010 whereby the Company issued shares for these services in conjunction with the Nicaragua-Ceelox Private Share Exchange described above.

On October 8, 2010, the Company entered into an additional agreement with the firm for continued investment banking and financial advisory services. As consideration for these services, pursuant to the Agreement, the Company agreed to issue (i) 150,000 shares of common stock no later than March 1, 2011, (ii) nine (9) consecutive monthly payments of $15,000 commencing on November 1, 2010, and (iii) $45,000 upon execution of the agreement.  The agreement states that the common stock is earned over twelve (12) consecutive months at 12,500 shares per month. The agreement is retroactive to August 1, 2010.  During the nine months ended September 30, 2011 and 2010, the Company recorded stock-based compensation of $52,125 and $0, respectively, related to this agreement. On March 1, 2011, the Company issued 150,000 shares for services rendered from August 2010 through July 2011.


F-13

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

8.      Recapitalization and Equity Activity (continued)

Marketing Agreement
 
On January 12, 2010, the Company entered into a corporate advisory services agreement (the "Agreement") with Core Consulting Group ("Core"). Pursuant to the Agreement, Core will provide non-exclusive advisory services to the Company in the areas of public and investor relations. The term of the Agreement is for a period of six months and pursuant to the agreement the Company has agreed to issue to Core an aggregate of 250,000 shares of its restricted common stock and to pay Core $100,000 in cash. The Agreement may be terminated by either party prior to six months if a material breach of the Agreement occurs by either the Company or Core.  The $100,000 payment to Core was made directly to Core on our behalf by Mr. Moore, our sole officer and director and was subsequently exchanged for a convertible note. The 250,000 shares of common stock which were both non refundable and non-forfeitable were valued at $15,000 and were expensed at date of issuance. The Company is recognizing the cash payment made to Core over the service period of six months and has recorded $83,333 in consulting expense through December 31, 2010.  On September 8, 2010, the Company extended its agreement with Core for a period of three months.  The Company has agreed to issue to Core an aggregate of 150,000 shares of common stock and to pay Core $20,000 in cash.  During the nine months ended September 30, 2011 and 2010, the Company recorded stock-based compensation of $0 and $50,000 respectively, related to this agreement.

The Company engaged an investor relations firm, CEOcast, Inc., for a four month limited engagement beginning July 16, 2010. As consideration for the investor relations consultant’s services the Company agreed to pay a monthly retainer of $7,500 and 34,483 shares of the Company’s common stock.  
 
 
On October 1, 2009 the Company renewed its services agreement with The Ashcroft Group as an advisor company with certain modifications. The services include supporting software marketing and sales opportunities with commercial and government accounts; advise the Company on government regulation and security requirements; endorsement of the Company’s security products; and advise and assist the Company in identifying and securing financing.

In consideration of such services described above, Company agreed to pay to The Ashcroft Group an amount of $20,000 each calendar quarter.  In addition, Company issued warrants to purchase 11,111 shares of Company common stock upon execution of this agreement. The warrant will be a three-year warrant, exercisable at a price of $0.81.  The Company also modified the exercise price of the previously issued warrant to purchase 55,556 shares of Company common stock to $0.81 and extended the term to September 30, 2012.  The compensation expense resulting from the issuance of the 11,111 warrant shares and the modification of existing warrants held by The Ashcroft Group was deemed immaterial. Company will also pay a commission to The Ashcroft Group in an amount equal to 5.0% of the gross collected revenue from opportunities resulting from this agreement.  Finally the Company further agrees to compensate The Ashcroft Group for assisting Company identifying financing between 1 percent and 5 percent depending upon the amount of financing secured.

On July 9, 2010, the Board of Directors approved by unanimous written consent the satisfaction of $30,000 owed to The Ashcroft Group by the issuance of 30,000 shares of the Company’s common stock.  The agreement with The Ashcroft Group dated October 1, 2009 called for quarterly payments of $20,000 for advisory services.   The remaining $10,000 owed was paid in cash.




F-14

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

8.      Recapitalization and Equity Activity (continued)

Legal Services Agreement

On February 1, 2011, the Company contracted with an attorney to provide Corporate Counsel Services and support its SEC reporting and public company legal matters.   In exchange for $70,000 in services the Company issued 100,000 non-refundable shares of its common stock for services.  The Shares were deemed fully earned upon signing of this Agreement and not subject to forfeiture.  In addition, the Company agreed to pay $5,000 per month for the Services up to twenty hours per month and thereafter at a rate per hour.  Upon mutual agreement of the Company and the attorney, the monthly services may be paid for by the issuance of the Company’s common stock.  In the event that the attorney agrees to accept shares of the Company’s restricted stock, the Company will issue an amount of restricted stock equal to $10,000 for each month that stock is issued for services.  The determination of the stock price for purposes of issuing shares hereunder shall be based on the stock price on the date of issuance.

Consulting Agreement

On March 22, 2011, we entered into an agreement with our CEO, Mr. Euston, (“Consulting Agreement”) whereby upon the occurrence of any of the following events (i) or (ii) below (hereafter defined as a “Trigger Event”) during the time when Mr. Euston’s employment agreement is in effect, Mr. Euston’s employment agreement will terminate and Mr. Euston will become a consultant to the Company.  Trigger Event shall mean either: (i) the sale of at least 75% of the stock of the Company to another company or (ii) the consummation by the Company of an S-1 secondary or other senior financing offering.

Mr. Euston will provide such consulting services as may be reasonably requested by the Company based on Mr. Euston’s experience and knowledge gained as an employee of the Company.  Mr. Euston will make himself available to the Company on an as needed basis subject to reasonable notification by the Company.  Mr. Euston’s time spent on Company matters will not exceed an average of 40 hours per month.  Additional hours may be provided by Mr. Euston at a compensation rate to be mutually agreed upon.   The term of the Consulting Agreement shall be for a period of 12 months, subject to earlier termination by the Company.

Pursuant to the terms of the Consulting Agreement Mr. Euston shall be paid a monthly fee of $7,500 during the term.  Upon the completion of a Trigger Event the Company shall issue to Mr. Euston a number of shares of the Company’s common stock valued at to $116,000, provided the employment agreement is in effect at the time of such Trigger Event.  If employment is terminated by the Company prior to the Trigger Event, Mr. Euston will receive a prorated stock grant.  Mr. Euston will also be entitled to reimbursement of pre-approved expenses incurred in connection with his services provided pursuant to the Consulting Agreement.

On September 15, 2011 the Company’s Chief Executive Officer and Acting Chief Financial Officer and Director, Mr. Gerry Euston, resigned.  Mr. Euston’s resignation was not the result of any disagreements concerning the Company’s operations or policies.  On September 16, 2011, the Board through Unanimous Written Consent, appointed Mr. William P. Moore, Chairman, to the additional positions of Acting Chief Executive Officer and Acting Chief Financial Officer.

Consulting Agreement
 
On March 22, 2011, the Company engaged a financial consulting services firm through May 5, 2011 to assist it in effectively presenting itself to the financial services community and develop a financial advisory strategy.  As compensation for the services the Company agreed to pay the consulting firm $150,000, of which $70,000 has been paid and the remaining $80,000 is due upon the closing of the Company’s next financing.

F-15

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

9.      Equity Incentive and Stock-Based Compensation Plan

Stock Option Plans

As of January 1, 2010, Ceelox Private had one stock option plan under which grants were outstanding. Grants under the stock option plan typically had a requisite service period of 36 months, straight-line or graded vesting schedules and expired not more than ten years from date of grant. The Plan was approved by the Ceelox Private board on January 2, 2007.  

On February 12, 2010, at the time of the reverse merger, the Company adopted the 2010 Stock Option Plan (the “Plan”) providing for stock-based incentive compensation to eligible employees, executive officers and non-employee directors and consultants. Grants under the Plan typically have a requisite service period of 36 months, straight-line or graded vesting schedules and expire not more than ten years from date of grant.

As of September 30, 2011, 3,820,922 shares of the 6,000,000 shares approved under the Company’s Plan remain available for grant. 

General Stock Option Information

Employee Options

On February 24 , 2011, the Company issued options totaling 195,000 to six of its employees with a strike price of $0.55, which 50% of the options vest on or after February 17, 2012 and the remaining 50% vest on or after February 17, 2013. In the event of a merger or consolidation of the Company with or into another corporation or entity in which the Company does not survive, or in the event of a sale of all or substantially all of the assets of the Company in which the stockholders of the Company receive securities of the acquiring entity or an affiliate thereof, all options immediately vest and become exercisable as of the day immediately preceding any such event.  Additionally, in the event that the Company receives gross proceeds of a minimum of $2,500,000 in equity, or equity-linked, securities from a non-affiliated third party(ies), all options immediately vest and become exercisable upon the Company’s receipt of any such proceeds.

As of September 30, 2011 and December 31, 2010, there was $0 and $8,488 of total unrecognized compensation cost, net of expected forfeitures, related to unvested stock-based compensation arrangements granted under the stock option plans.

Stock-Based Compensation

Stock Options

During the nine months ended September 30, 2011 and 2010, the Company recorded stock-based compensation related to stock options of $13,483 and $122,269, respectively.

10.      Concentrations

For the nine and three months ended September 30, 2011 and 2010, the Company had two major customers, which represented approximately 97% and 97% of the respective years’ revenue.  Accounts receivable from these customers at September 30, 2011 and December 31, 2010 were $0 and $6,730, respectively.

F-16

 
 

 

CEELOX, INC. and SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)

11.      Merger & Acquisition Agreement

On June 8, 2010 the Company entered into an exclusive merger and acquisition engagement with an investment banking firm.  Per terms of the engagement the investment banking firm will identify target transaction companies and assist the Company in concluding an M&A transaction or transactions.  The Company paid an initial activation fee of $10,000 and thereafter, a monthly retainer of $7,500 for three months commencing July 1, 2010 and $5,000 for the following three months.  In addition the Company will issue 250,000 advisory warrants of which 125,000 will be issued on the date the Company enters into a letter of intent with a target transaction partner and 125,000 on the date the Company enters into a definitive agreement with a target transaction partner.  The warrants have a five year term and a strike price of $0.85.  The Company will also pay a success fee on the closing of a transaction equal to the greater of $250,000 or 3% of the aggregate value paid or received by the Company. This agreement lapsed on December 31, 2010, however there is an 18 month tail provision related to the transaction fees described above, should the Company close a transaction of the nature contemplated above with a party introduced to it by the investment banking firm.

12.      Lock-Up Agreements

On April 27, 2011, the Company entered into a lock-up agreement with a related party for purposes of effecting a more orderly disposition of such shares of common stock.  Pursuant to the lock-up agreements, such related party has agreed not to sell any of the 375,995 shares held by it for a period of 30 days.  In exchange therefore, the Company has paid the related party $15,000 for a 30 day lock-up on May 27, 2011 and the Company extended the lock-up period for an additional 30 days with the payment of an additional $15,000 to the related party.

On April 28, 2011, the Company entered into a lock-up agreement with two additional related parties pursuant to which such related parties have agreed not to sell any of the 170,291 shares held by them for a period of 60 days.  In exchange therefore the Company has agreed to pay the related parties an aggregate of $10,000.  However, in the event that the Company introduces a third-party that offers to acquire the shares from the stockholders during the lock-up period at $0.45 per share and the related parties reject such offer they shall not be entitled to the $10,000 payment.


















F-17

 
 

 

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This section of this quarterly report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of our prospectus. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

Overview

We were formed for the purpose of developing and marketing advanced security solutions using fingerprint and other biometric technology and encryption software solutions.   Our biometric identification and encryption software solutions provide innovative and new ways for customers to securely access, store, send and receive confidential information.  Biometric technology is the science of analyzing specific human characteristics which are unique to each individual in order to confirm the identity of an individual or identify a specific person from a broader population.  The use of biometrics enables enterprise and consumer users to login to different systems and applications using secure credentials based on their unique characteristics, while blocking unauthorized users.  Our biometric authentication provides strong protection against identity theft.  We commenced marketing our products in the first half of 2007 following more than three years of technology and product development.  We believe that our products meet the needs of companies that require strong data, systems and applications security including financial institutions, healthcare providers, insurance companies, government agencies, utilities, eMerchants, social network providers, and any business where security and identification are key concerns.  To date we have invested over $13 million in the operations of the business including research and development, product development and marketing of our products.

Results of Operations

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Net Revenue

For the nine months ended September 30, 2011 and 2010 the Company had revenues of $21,101 and $23,942, respectively.   This results from the fact that the Company was focused on affecting a reverse merger with a public company and securing funding to execute its business plan. Managements’ expectations are that this reverse merger transaction will ultimately provide funding necessary to increase its marketing efforts which will generate increased sales volume.

Total Operating Costs and Expenses

Our total cost and expenses which consist of payroll and related benefits, consulting expenses, marketing, general and administrative expenses, depreciation and amortization, and research and development expenses decreased by $758,679 or 39% for the nine months ended September 30, 2011 from the nine months ended September 30, 2010.  The decrease in Operating Costs and Expenses was due primarily to decreases in salaries and benefits of $415,421 and accounting, consulting and marketing related expenses of $319,448.

Loss from Operations

Our operating loss for the nine months ended September 30, 2011 was $1,161,685 compared to a loss of $1,917,523 for the nine months ended September 30, 2010.  The decreased loss from operations of $755,838 or 39% was due largely to lower salaries and benefits and the related expenses stated above.

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Interest Expense

Interest expense and related financing fees for the nine months ended September 30, 2011 was $260,675 compared to $418,151 for the nine months ended September 30, 2010, a decrease of $157,476 or 38% primarily due to lower interest because of the conversion of the convertible bridge notes below and lower advances under the license agreement below.  In August 2005, the Company entered into a convertible note from a related party totaling $300,705 (see footnote 5 of the Company’s condensed consolidated financial statements).  Interest on that note was $33,860 for nine months ended September 30, 2011 compared to $28,618 for the same period in 2010.  In February 2010, the Company issued convertible notes to a related party totaling $450,000 (see footnote 5 of the Company’s condensed consolidated financial statements) which contributed $21,339 additional interest expense.  Between August 2009 and February 2010, the Company issued convertible bridge loan notes totaling $629,735, of which $350,000 was converted in February 2010.  Interest expense on these notes was $26,978 for the nine months ended September 30, 2011.  Of the $26,978 in interest expense, $17,274 is related to accrued interest and $9,704 is related to debt discount.  On July 20, 2007 the Company granted a related party an exclusive, fully paid-up, royalty-free, irrevocable, perpetual, worldwide, transferable, assignable license, with the right to sublicense in and to all the Company’s intellectual property (the “License Agreement”).  Subject to the License Agreement the Company maintains all of its right, title and interest in and to the intellectual property. The License Agreement was effective immediately and continues indefinitely, unless and until terminated by mutual agreement.  Additionally and in connection with this agreement, the Company entered into a Software Services Agreement with the related party whereby they agreed to pay Ceelox costs associated with marketing its products and maintaining and developing our products based on our biweekly cash burn rate, net of sales collections.  During the nine months ended September 30, 2011 the Company received additional advances under this agreement of $385,552 which resulted in additional interest expense of $96,388.  See Footnote 4 of the Company’s condensed consolidated financial statements for additional detail.

Net Loss

During the nine months ended September 30, 2011 and 2010 the Company incurred net losses of $1,422,360 and $2,335,674, respectively.  The decreased losses of $913,314 were primarily due to lower salaries and benefits and merger related and interest expenses.

Liquidity and Capital Resources

As of September 30, 2011, we had a working capital deficit of $9,979,586, as compared to a working capital deficit of $8,789,424 as of December 31, 2010.  In the past we have relied on sales of our equity to raise funds for our working capital requirements, as well as loans from our majority stockholder.  We will need to raise additional capital in order to implement our business plan and will seek to sell additional equity and/or debt to accomplish this objective.  There can be no assurance that we will be able to raise funds sufficient to carry out our business plan, or that if funds are available to us that they will be on acceptable terms.

Operating Activities

Cash used in operations of $894,376 during the nine months ended September 30, 2011 was primarily a result of our $1,422,360 net loss reconciled with our net non-cash expenses relating to stock-based compensation expense, accrued interest, and depreciation and amortization expense.  Cash used in operations of $1,483,896 during the nine months ended September 30, 2010 was primarily a result of our $2,335,674 net loss reconciled with our net non-cash expenses relating to operating activities.

Investing Activities

During the nine months ended September 30, 2011 and September 30, 2010 we expended $0 and $1,132, respectively.  The amounts we expended for the nine months ended September 30, 2010 were for the purchase of property and equipment.
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Financing Activities

During the nine months ended September 30, 2011, we generated proceeds of $868,647 from our financing activities which consisted of: (i) advances from related parties of $385,552, and (ii) proceeds from a related party note of $482,877.

Seasonality Results

We do not expect to experience any seasonality in our operating results.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements or financing activities with special purpose entities.

Results of Operations

Three months Ended September 30, 2011 Compared with Three months Ended September 30, 2010

Net Revenue

For the three months ended September 30, 2011and 2010 the Company had revenues of $9,725 and $7,573, respectively.   This results from the fact that the Company was focused on affecting a reverse merger with a public company and securing funding to execute its business plan. Managements’ expectations are that this reverse merger transaction will ultimately provide funding necessary to increase its marketing efforts which will generate increased sales volume.

Total Operating Costs and Expenses

Our total cost and expenses which consist of payroll and related benefits, consulting expenses, marketing, general and administrative expenses, depreciation and amortization, and research and development expenses decreased by $570,290 or 80% for the three months ended September 30, 2011 from the three months ended September 30, 2010.  The decrease in Operating Costs and Expenses was due primarily to decreases in salaries and benefits of $204,239 and accounting, consulting and marketing expenses of $389,042.  The decreases were partially offset by an increase in legal expenses of $52,113.

Loss from Operations

Our operating loss for the three months ended September 30, 2011 was $129,067 compared to a loss of $701,509 for the three months ended September 30, 2010.  The decreased loss from operations of $572,442 or 82% was due largely to lower salaries and benefit expenses stated above.

Interest Expense

Interest expense and related financing fees for the three months ended September 30, 2011 was $48,054 compared to $116,261 for the three months ended September 30, 2010, a decrease of $68,207 or 59% primarily due to lower interest because of the conversion of the convertible bridge notes below and lower advances under the license agreement below.  In August 2005, the Company entered into a convertible note from a related party totaling $300,705 (see footnote 5 of the Company’s condensed consolidated financial statements).  Interest on that note was $11,640 for three months ended September 30, 2011 compared to $10,736 for the same period in 2010.  In February 2010, the Company issued convertible notes to a related party totaling $450,000 (see footnote 5 of the Company’s condensed consolidated financial statements) which contributed $7,336 additional interest expense.  Between August 2009 and February 2010, the Company issued convertible bridge loan notes totaling $629,735, of which $350,000 was converted in February 2010.  Interest expense on these notes was $9,091 for the three months ended September 30, 2011.  Of the $9,091 in interest expense, $5,821 is related to accrued interest and $3,270 is related to debt discount.

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Interest Expense (continued)

  On July 20, 2007 the Company granted a related party an exclusive, fully paid-up, royalty-free, irrevocable, perpetual, worldwide, transferable, assignable license, with the right to sublicense in and to all the Company’s intellectual property (the “License Agreement”).  Subject to the License Agreement the Company maintains all of its right, title and interest in and to the intellectual property. The License Agreement was effective immediately and continues indefinitely, unless and until terminated by mutual agreement.  Additionally and in connection with this agreement, the Company entered into a Software Services Agreement with the related party whereby they agreed to pay Ceelox costs associated with marketing its products and maintaining and developing our products based on our biweekly cash burn rate, net of sales collections.  There were no additional advances or additional interest expense related to this agreement for the three months ended September 30, 2011.  See Footnote 4 of the Company’s condensed consolidated financial statements for additional detail.

Net Loss

During the three months ended September 30, 2011 and 2010 the Company incurred net losses of $177,121 and $817,770, respectively.  The decreased losses of $640,649 were primarily due to lower salaries, benefits and interest expenses.

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rates

We are not being exposed to market risks relating to changes in interest rates because all outstanding debt bears interest at a fixed rate.  We currently do not engage in any interest rate hedging activity and have no intention of doing so in the foreseeable future.

Foreign Exchange

The company has no exposure to foreign exchange fluctuations.

Inflation

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

ITEM 4.          CONTROLS AND PROCEDURES.

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our Disclosure Controls were not effective as of the end of the period covered by this report.  We believe that a material weakness exists as of September 30, 2011, with regard to limitations in the capacity of the Company's accounting resources to identify and react in a timely manner to non-routine, complex and related party transactions as well as the adequate understanding of the disclosure requirements relating to these transactions.  As such, as of September 30, 2011, we do not believe that our disclosure controls and procedures were effective.
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Changes in Internal Controls
 
There have been no changes in our control over financial reporting that materially affected, or is reasonably likely to material affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

ITEM 1A.       RISK FACTORS.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 6.          EXHIBITS.

The following documents are included herein:

Exhibit No.
Document Description
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Certification of Chief Financial Officer 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, this report has been signed below by the following person on behalf of the Registrant and in the capacities on this 17th day of November, 2011.

 
CEELOX INC.
 
(the “Registrant”)
   
   
 
By:
MARK L. GRANNELL
   
Mark L. Grannell
   
Chief Executive Officer and Chief Operating Officer
     
     
 
 By:
WILLIAM P. MOORE
   
William P. Moore
   
Secretary, Treasurer and Chief Financial Officer


































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EXHIBIT INDEX


Exhibit No.
Document Description
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.






































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