Ceelox Inc. - FORM 10-K - April 15, 2013

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EX-32.2 - SARBANES-OXLEY 906 CERTIFICATION - CHIEF FINANCIAL OFFICER. - Ceelox Inc.	exh32-2.htm
EX-32.1 - SARBANES-OXLEY 906 CERTIFICATION - CHIEF EXECUTIVE OFFICER. - Ceelox Inc.	exh32-1.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-31.2 - SARBANES-OXLEY 302 CERTIFICATION - PRINCIPAL FINANCIAL OFFICER. - Ceelox Inc.	exh31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ý ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2012

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 000-53597

CEELOX, INC.

(Name of small business issuer in its charter)

Nevada	26-1319217
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

10801 Mastin, Suite 920

Overland Park, Kansas 66210

(Address of principal executive offices, Zip code)

(913) 884-3705

(Issuer’s telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.00001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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 (§ 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 o No o Not Applicable

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý

The aggregate market value of the issuer’s voting and non-voting common equity held by non-affiliates (26,696,365 shares) was approximately $266,964, based on the last sale price of the issuer’s common stock of $0.01 for such common equity on June 30, 2012. As of April 4, 2013, there were outstanding [38,647,556] shares of the issuer’s Common Stock, par value $0.00001.

FORWARD LOOKING STATEMENTS

Some of the statements under “Management’s Discussion and Analysis of Financial Condition,” and “Description of Business” in this Annual Report on Form 10-K are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Annual Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results.

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CEELOX, INC. and SUBSIDIARY

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012

TABLE OF CONTENTS

		Page

PART I
Item 1.	Description of Business.	4
Item 1A.	Risk Factors.	10
Item 1B.	Unresolved Staff Comments.	13
Item 2.	Properties.	13
Item 3.	Legal Proceedings.	13
Item 4.	Mine Safety Disclosures.	13

PART II
Item 5.	Market Price for the Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities.	13
Item 6.	Selected Financial Data.	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	20
Item 8.	Financial Statements and Supplementary Data.	20
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	44
Item 9A.	Controls and Procedures.	44
Item 9B.	Other Information.	45

PART III
Item 10.	Directors and Executive Officers, Promoters and Control Persons.	45
Item 11.	Executive Compensation.	45
Item 12.	Security Ownership of Certain Beneficial Owners and Management.	46
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	47
Item 14.	Principal Accounting Fees and Services.	47

PART IV
Item 15.	Exhibits and Financial Statement Schedules.	48

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Ceelox, Inc. (the “Company”) 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.

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.

The Company formally changed its name from Nicaragua Rising, Inc. to Ceelox, Inc., a Nevada Corporation, on September 30, 2010. We have invested over $12 million in the operations of the business including research and development, product development and marketing of our products.

As announced on Form 8-K filed with the SEC on January 27, 2012, Ceelox completed the fulfillment of the demand notice from CIP, LLC. In this agreement, Ceelox converted over $8 million in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. Since that time Ceelox has continued development of its business plan surrounding virtual credit card, social networking, and mobile, security. In addition, the Company continues dialog with CIP and will seek to license and/or purchase the intellectual property from CIP as appropriate to complete their new product rollout.

Product Focus

Our business plan identifies three business-to-business-to-consumer (B2B2C) mass market opportunities that are on the forefront of the previously mentioned exploding adoption of mobile computing with internet-based applications. These consumer solutions are currently susceptible to the man-in-the-middle threats but are cured though the Ceelox’ parallel key infrastructure approach. Any one of these opportunities could produce significant revenues. Each also requires significant partners or acquisitions in the related space that offer significant market presence and recognition, scale, infrastructure, and speed to market.

These are:

VIRTUAL CREDIT CARD --- a form of ecommerce that removes the need for the transmission of any financial information such as credit card number, user social security number and other personal information that is so vulnerable to identity theft. We will describe the details of this solution, but the head line is “your finger is your credit card”. This approach could also be applied to a point-of-sale application where stolen or fraudulent credit cards are often used.

Introduction. The business of doing business online, at a minimum, is compromised by the following factors:

·	The current state of the art in technology designed to stop online credit card fraud is highly imperfect and results in billions of dollars in lost sales each year due to “false positive” user authentication (the “Authentication Problem”)

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·	In 2009, online vendors suffered over $4 billion in credit card charge backs resulting from vendors accepting a bogus credit card charge on-line (the “Vendor Chargeback Problem”)

It is widely believed that more people would make purchases online if they believed the payment mechanism was secure. The Ceelox approach allows for Strategic Corporate Partners in this business opportunity to guarantee online vendors that they would suffer no charge backs on transactions using the Ceelox Virtual Credit Card.

Summary Solution Concept. In the technology solution that Ceelox plans to implement, the Consumer will not transmit his or her credit card credentials over the internet to the vendors’ site to pay for his or her transaction. Rather, the user applies for his virtual credit card responding to one of the same marketing approaches employed today to sell credit cards—albeit, the Ceelox powered card would be marketed with a ‘No Fraud’ guarantee. The virtual cardholder’s pertinent data is entered into the Ceelox Virtual Credit Card Authentication system. Cardholders are then directed to the secure Virtual Credit Card Authentication Server site with one time password and challenge question(s) for user identity vetting before enrolling multiple fingerprints or other form of biometric i.e. retna, voice recognition, vein scan, etc. The card number and related cardholder information is then linked one-to-one with the biometric of the user.

The Corporate Partnering Strategy or Acquisition Target. For this business opportunity to be viable, Ceelox must have a strategic corporate partner. The logical choices are as follows:

·	An existing major credit card association (e.g. AMEX, Mastercard, Visa and Discovery)

·	An aspiring credit card vendor (e.g. Wal-Mart or its bank subsidiary, Arvest Bank, etc.) seeking to differentiate itself

·	An on-line payment intermediary (e.g. PayPal, Google Checkout, or AliPay in China)

·	A consumer bank seeking to offer a differentiated (i.e., secure) credit card to its clients

·	An independent host of the Virtual Credit Card Authentication Server (e.g., VeriSign/Symantec)

Because Ceelox’ approach, arguably the entity that partners with Ceelox on this opportunity will have a highly advantaged competitive market position with both (i) vendors who seek to avoid online credit card fraud charge backs and (ii) consumers who will find this method of doing business online to be virtually secure.

The Business Model for the Strategy. The Ceelox Virtual Credit Card should have two immediate impacts:

·	The guarantee of no cyber crime-linked charge backs should cause all on-line retailers to want to settle their online consumer transactions using the Ceelox virtual card payment solution, thereby eliminating the severe profit drain on their business from online credit card fraud;

·	On-line sales should increase because:

o	sales should not be lost to false negative authentications (a problem which costs the industry an estimated $14B today); and

o	The clearly superior transactions security afforded by the solution should cause an increase in the number of consumers transacting purchases online for the first time.

Current credit card fees for online transactions average 2% to 3%, depending on a variety of factors. Because of the benefits that the Ceelox Technology brings to the online retailer (and the “peace of mind” it will bring to consumers), capturing as little as 0.1% fee share on Ceelox authenticated online sales seems more than feasible, which is worth millions for a minute share of the online sales revenue.

TRUST ID -- a secure way of identifying oneself, through identity proofing in the enrollment process and biometric authentication, within a social website. This provides everyone, of all ages, confidence that the person you are conversing with is an actual person with the claimed identity. With a swipe of your finger (or presentation of some other “live” biometric i.e. retna, voice recognition, vein scan, etc.) Trust ID will provide safe, secure social networking.

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Introduction. Social Networks are great places to meet and network with people sharing similar personal or business interests, but they also pose serious security threats to users and their companies. The number of these sites is increasing and the aggregate enrolled population of these sites is massive; with the top three representing over 1 billion members.

Social Network sites are replete with fraudulent users with phony identities and stolen accounts making social networking unsafe. Reputations are at risk, children are at risk, and all users are at risk from predators, sex offenders and the like. Facebook alone is believed to have millions of phony users.

Summary Solution Concept. The Ceelox Trust ID Digital Identity will use its process to create a trusted identity for each social network member. In this way, the Ceelox solution will create a safe, trusted social networking environment with the knowledge that Trust ID users are real people with vetted identities. When a registered user seeks to sign on to a social network site, the Trust ID user will be prompted when logging in to confirm their identity by swiping their finger (or other “live” biometric) confirming their identity via the Ceelox Trust ID Authentication Server. The Social Network partner will place the Trust ID icon next to any social networker online to identify them to all other social networkers as a real person with a vetted identity.

The Corporate Partnering Strategy or Acquisition Target. For this business opportunity to be viable, Ceelox must have strategic corporate partners. In this case, the partner solicitation strategy is obvious: the social networks.

The Business Model for the Strategy. Insofar as the product will be offered and hosted by the subject social network, the simplest business model would be one where the social network offers its members the opportunity to subscribe on an annual basis for the Trust ID. With over 1 billion social members, even a miniscule penetration could yield millions in annual, recurring revenue.

SECURE MOBILE PHONE --- a vast number of consumers (9 of 10) use their mobile phone to conduct business online, chat, share pictures, send and receive corporate email, etc. As a result, they are at high risk of theft and exposing personal and sensitive business information. To further expand the opportunity, the Wireless Telecom Market is a commodity market and Carriers are searching for add-on revenue sources. Through the introduction of a biometric on a phone coupled with Ceelox authentication software, a solution for both of these opportunities is provided enabling a new platform for revenue growth, including secure mobile commerce.

Introduction. While billions of dollars are spent each year for personal end-point security of the PC and the information stored thereon, the security of mobile phone access and the data and communications stored and transacted thereon is hugely vulnerable.

This problem is mounting as more and more mobile phone users upgrade to a smart phone and subscribe to a 3G or 4G network service:

·	As of June 2010, 93% of the US household population had a cell phone.

·	Of these, 123 million are 3G network subscribers.

·	On the global retail purchasing side, the market for electronic mobile wallet services is growing fast and Gartner Group predicts it could reach $245 billion in value by 2014.

The immense macro trends associated with the rising importance of the mobile phone in the global economy speak for themselves. The issue remains that the mobile phone, as currently configured, is extremely vulnerable to unauthorized access and use.

Summary Solution Concept. Ceelox has the technology to limit phone access solely to its registered owner, secure the data resident on the phone, and safeguard any payment and banking transactions performed thereon. Just as PC’s today can be equipped on an OEM basis with an inexpensive fingerprint reader to control access, so too can the mobile phone (“100% Secure Access Control”); Note: or other form of biometric can be used i.e. retna, voice recognition,

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facial recognition, etc. Through the use of a “live” biometric, the Ceelox process will provide 100% Secure Access Control by allowing the user to register his personal data in a Secure Biometric Server hosted by the service provider (the “Hosting Service Provider”) that is linked one-to-one with the user’s biometric file.

As with its Virtual Credit Card implementation, the power of Ceelox’ process is that, even if a cyber criminal had possession of the mobile phone user’s name, address, phone number and credit card or bank account number and even the users mobile phone itself, the cyber criminal could not gain access to the phone and the subject transaction accounts.

The Corporate Partnering Strategy or Acquisition Target. For this business opportunity to be viable, Ceelox must have a strategic corporate partner, which could be implemented in one of several ways as follows:

Carrier-Led Partnering Strategy. The most logical partnering strategy for this market opportunity would be an existing Telco carrier that has an established 3G mobile network and could most easily host and deliver the service as part of a strategy to provide a highly desired and differentiated premium service to its customers. Because the opportunity is a global one, logically the solicitation of corporate partners would include both (i) US mobile service providers and (ii) international mobile carriers.

·	Other Partnering Strategies. An alternative partnering strategy would be to pursue mobile phone OEM’s to deploy and host the recurring hosted services described above.

Business Model: With regard to the US alone, if Ceelox were able to obtain a small user fee i.e. $1.00 per month from the customers electing to use the premium services, we believe that each 1% share of such market is worth $12 million in annual revenue and growing.

Implementation

A result of the continued focus on our business plan, Ceelox has signed purchase agreements to acquire the assets of Send Global and AllCom:

Send Global

As announced on Form 8-K filed with the SEC on October 31,2012, on October 25, 2012, the Company entered into an asset purchase agreement (“Agreement”) with Send Global Corporation, a Michigan corporation (“Send Global”), and iTeknik Holding Corporation, a Wyoming corporation and the Parent company of Send Global(“Parent,” and together with Send Global, the “Sellers,” and each a “Seller”). The Company has agreed to purchase substantially all of the assets of Send Global in exchange for: (i) $1,750,000 in cash, less the audit adjustment amount, if any, less the audit costs, (ii) twelve million shares of the Company’s common stock, and (iii) the assumption of certain of Send Global’s liabilities, (the “Purchase Price”). The Purchase Price shall be paid as follows:

·	Not later than November 22, 2012, the Company shall pay Parent a non-refundable cash payment of One Hundred Twenty-Five Thousand Dollars ($125,000), less the Audit Costs, all of which has been paid;

·	Not later than January 31, 2013, the Company shall pay Parent a non-refundable cash payment of One Hundred Twenty-Five Thousand Dollars ($125,000), all of which has been paid; and

on the Closing Date, the Company shall deliver to Parent (x) an amount in cash equal to the remaining Cash Payment of One Million Five Hundred Thousand Dollars ($1,500,000), less the audit adjustment amount, if any, and (y) either the additional payment of Five Hundred thousand dollars ($500,000) or the issuance of twelve million (12,000,000) shares of the Company’s common stock (“Common Stock Consideration”).

As part of the acquisition, the Company has agreed to assume certain accounts payable, deferred revenue and operational liabilities of Send Global.

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The closing date is expected to be on the first business day following the six month anniversary of the date of the Agreement.

AllCom

As announced on Form 8-K filed with the SEC on December 3, 2012, on November 27, 2012, the Company entered into an asset purchase agreement (“Agreement” or “Asset Sale”) with AllCom, a Nevada corporation (“AllCom” or “Seller”). The Company has agreed to purchase all of the assets (“Purchased Assets”) of AllCom (“Acquisition”) in exchange for the issuance of that number of shares of Common Stock such that, following such issuance, the Seller shall own forty-eight percent (48%) of all the issued and outstanding shares of Common Stock of the Company as of the closing date of the Acquisition, (the “Closing Purchase Price”).

In addition to the Purchase Price, the Company has also agreed to loan (the “Loan”) to Seller an aggregate of $1,800,000 (“Loan Amount”) prior to the closing of the Acquisition. The Seller shall use the Loan Amount in order to ensure the delivery of the Purchased Assets to the Company free and clear of all liens (other than permitted liens) in accordance with the terms and conditions of the Agreement. The Loan Amount shall be paid to Seller as follows:

(i)

On or before March 31, 2013, in order to fund the Loan, the Company shall be obligated to pay to the Seller at least fifteen percent (15%) of the net proceeds actually received by the Company pursuant to the closing of any debt or equity financing; provided, however, that the Seller shall not be entitled to any amounts, in the aggregate, exceeding the Loan Amount. To date no funds have been provided to AllCom.

(ii)	If prior to the closing of the Acquisition the funded amount of the Loan is less than one million eight hundred thousand dollars ($1,800,000), then, at closing of the Acquisition, the Buyer shall pay to the Seller an amount equal to the shortfall.

The Loan shall be evidenced by a promissory note (“Note”) that shall become due and payable on the one-year anniversary date of the closing of the Acquisition. The Note shall be secured by that number of shares of Common Stock representing the Purchase Price with a value equal to the Loan Amount. For purposes hereof, the shares of Common Stock representing the Closing Purchase Price shall initially be valued at $0.25 per share. Such share value shall be reassessed every quarter following the issuance of the Note based on the thirty (30) day volume weighted average price of the Company’s common stock (“VWAP”) measured as of the end of such quarter, and the number of shares of Common Stock by which the Note is secured shall be adjusted accordingly; provided, however, that at no time shall the share value be less than $0.25 per share. The Seller will pledge as security, a maximum of seven million two hundred thousand (7,200,000) shares of the Company’s Common Stock received as part of the Purchase Price. Notwithstanding the foregoing, the number of shares will be adjusted based on the quarterly review as described above. As long as any balance on the Note remains outstanding, the Seller may not sell any shares of Common Stock representing the Closing Purchase Price to a third party without first offering such shares to the Company in accordance with the terms of the Agreement.

The Loan Amount may also be satisfied by the Seller if, on or prior to the closing of the Acquisition, the Seller (x) enters into a contract with a third party whereby it will receive a down payment and/or revenue sharing in at least an amount equal to the Loan Amount, or (y) receives a loan in the minimum amount of one million eight hundred thousand dollars ($1,800,000) from a third party, subject to such terms and conditions as agreed between the Seller and such third party (a “Third Party Loan”).

The Issuer shall be obligated to issue to the Seller as additional consideration, those shares of Common Stock of the Company set forth below (the “Earn-out Purchase Price,” and together with the Closing Purchase Price and the Loans (if any), the “Purchase Price”):

If Gross Profit equals or exceeds $2,000,000 (the “Gross Profit Target”) on or prior to the twelve (12) month anniversary of the Closing Date (the “Earn-out Measurement Date”), then, as soon as practicable following the determination that the Gross Profit Target has been exceeded (but in no event later than ten (10) days after the date of such determination), the Company shall issue to the Seller an additional eighteen percent (18%) of all the issued and

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outstanding shares of Common Stock of the Company as of the Closing Date (the “Maximum Earn-out Shares”), which shall increase the Seller’s ownership of all Common Stock of the Company’s issued and outstanding shares as of the Closing Date from forty-eight percent (48%) to sixty-six percent (66%).

In the event that Gross Profit does not exceed the Gross Profit Target on or prior to the Earn-out Measurement Date, then, on the Earn-out Measurement Date, the Company shall issue to the Seller that number of shares of Common Stock which is equal to (x) the percentage of the Gross Profit as compared to the Gross Profit Target, multiplied by (y) the Maximum Earn-out Shares. For example, if the Gross Profit is equal to 90% of the Gross Profit Target, then the Seller will receive 90% of the Maximum Earn-out Shares.

For purposes hereof, “Gross Profit” shall mean the total revenue generated by the subsidiary of the Company which holds the Purchased Assets less total cost of sales as each are reflected on the income statement contained in the applicable unaudited financial statements for the applicable year. For purposes of calculating Gross Profit, in the event of any conflict between the Company’s historic practices and GAAP, GAAP shall prevail. The Company shall make a determination as to Gross Profit on a quarterly basis beginning at the end of the first quarter in which the Closing occurs and shall inform the Seller of the same in writing.

The Company will not assume any liabilities of the Seller in connection with the Acquisition.

The closing of the Acquisition is expected to occur on or before April 30, 2013, or as soon as reasonably practicable following the satisfaction or waiver of all of the conditions precedent to Closing (other than conditions with respect to actions that will take place at the Closing itself), including among other conditions as more fully set forth in the Agreement receipt by the Seller of an amount equal to the Loan Amount (whether in connection with the issuance of the Note or otherwise), the closing of the transaction contemplated by the Send Global Purchase Agreement entered into by and between the Company, Send Global and ITEKNIK on October 25, 2012 as previously reported on Form 8-K on October 31, 2012, and the Company shall have raised funds pursuant to the closing of a financing(s) providing the Company with at least $4,000,000 in proceeds, or at such other date, time and place as the Seller and the Company shall mutually agree in writing. The Auditors shall have completed the Audit of Seller and there shall be no material deviation from what is shown in the Financial Statements, which shall be solely determined by the Auditors. The cost for the Audit will be underwritten by the Company.

For a period of eighteen (18) months from the closing of the Acquisition, Seller has agreed not to sell any shares of Common Stock representing the Purchase Price, to a third party without first offering to sell such shares to the Company by delivering to the Company written notice of the proposed sale.

On March 28th, the Company and AllCom agreed to extend the closing date from March 31, 2013 to April 30, 2013.

Business Strategy

The goal of the company will be to combine the assets of all three companies and personnel to create a financial platform and distribution network. Utilizing AllCom’s CashBox and alternative merchant processing services, the Company will offer a secure and private, payments and communications service. With the CashBox Subscribers can make and receive calls and cash payments, without ever revealing their personal telephone numbers or credit card information.

Competition

The markets for our products and technologies are developing and characterized by intense competition and rapid technological change. No assurance can be given that our competitors will not develop new or enhanced technologies that will offer superior price, performance, or features, or render our products or technologies obsolete.

Our competitiveness depends on our ability to offer high-quality products that meet our customers’ needs on a timely basis. The principal competitive factors of our products are time to market, quality, price and reliability of the product line. Many of our competitors have significant advantages over us such as far greater name recognition and financial resources than we have. At this time we do not represent a significant competitive presence in our industry.

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ITEM 1A. RISK FACTORS

RISKS RELATING TO OUR BUSINESS

We have a history of losses and may not be profitable in the future.

We have incurred substantial losses and had negative cash flow in operating activities for the last two fiscal years and for the years ended December 31, 2012 and December 31, 2011 we had an accumulated deficits of $26,200,410 and $25,639,943 respectively.

We sustained net losses of $580,239 and $1,722,241 for the years ended December 31, 2012 and 2011, respectively. We cannot assure you that we will generate sufficient cash flow to meet our obligations or achieve operating profits in the future.

We have relinquished an exclusive license to a related party for all of our intellectual property.

As announced in an 8-K dated January 27, 2012, Ceelox completed the fulfillment of the demand notice from CIP, LLC. In this agreement, Ceelox converted over $8 million in debt to 24 million shares in equity and turned over all intellectual property and software to CIP. Since that time Ceelox has continued development of its business plan surrounding credit card, social networking, and mobile, security. Ceelox will continue to seek merger and acquisition candidates with synergies within these areas. Ceelox is currently in dialog with CIP and will seek license and/or purchase the intellectual property from CIP as appropriate to complete their new product rollout.

Even if we successfully complete any acquisition as part of our business strategy, we may fail to successfully integrate the business of any such acquisition into our operations and realize the anticipated benefits from such integration on a timely basis, or at all, which could negatively impact our business.

The success of any acquisition will depend on our ability to realize the anticipated benefits from integrating a target company’s business into our operations. Our business could be disrupted and our management’s attention diverted due to these integration planning activities and as a result of the actual integration of our company with any such acquisition following the acquisition. Following any such acquisition, we may fail to realize the anticipated benefits there from on a timely basis, or at all, for a variety of reasons, including the following:

·	difficulties entering new markets in new geographies where we have no or limited direct prior experience;

failure to identify or assess the magnitude of any liabilities we may assume in connection with an acquisition, which could result in unexpected litigation or regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on our business, operating results or financial condition; and

·	difficulties or delays in incorporating acquired technologies into our proposed products.

If we are not able to successfully integrate the business and technology of any such acquisition into our operations, the anticipated benefits and efficiencies of any such acquisition may not be realized fully or at all, or may take longer to realize than expected, and our ability to compete may be adversely affected.

Our solutions may contain defects which will make it more difficult for us to establish and maintain customers.

Despite extensive testing during development, our products may contain undetected design faults and errors, or “bugs” that are discovered only after it has been installed and used by customers. Any such defect or error in new applications could cause delays in delivering our technology or require design modifications. These could adversely affect our competitive position and cause us to lose potential customers or opportunities.

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In order to generate revenue from our products, we are dependent upon third parties and strategic partners which we do not control. As a result, it may be more difficult to generate sales.

Our success will depend upon the ability of these distribution channel partners to effectively integrate our technology into products and services which they market and sell. We have no control over these partners and cannot assure you that they have the financial, marketing or technical resources to successfully sell, integrate and distribute products or applications to end users or generate any meaningful revenue for us. These third parties may also offer the products of our competitors to end users.

We will need to raise additional capital in order to implement our long-term business plan.

Our ability to implement our long-term strategy and expand our operations largely depends on our access to capital. To implement our long-term strategy, we plan to make ongoing expenditures for the expansion and improvement of our product line and the promotion of our products. We may also wish to make expenditures to acquire other businesses. To date, we have financed our operations primarily through sales of equity, the issuance of notes and advances from related parties. If we were to attempt to expand our business at a faster pace than currently contemplated, or if we were to identify an acquisition target, we would need to raise additional capital through the sale of our equity securities or debt instruments. However, additional capital may not be available on terms acceptable to us. Our failure to obtain sufficient additional capital could curtail or alter our long-term growth strategy or delay needed capital expenditures.

We may not be able to effectively manage our growth.

Our strategy envisions growing our business. We plan to continue to develop our products and to hire additional sales, software engineers, administrative and marketing personnel. Any growth in or expansion of our business is likely to place a strain on our management and administrative resources, infrastructure and systems. In order to expand our business, we may be required to purchase or lease additional machinery and equipment, hire, train and supervise additional personnel and make significant outlays of capital. These measures are time consuming and expensive, will increase management’s responsibilities and will divert management’s attention from our day-to-day operations. We cannot assure you that we will be able to:

•	expand our systems effectively or efficiently or in a timely manner;

•	allocate our human resources optimally;

•	meet our capital needs;

•	identify and hire qualified employees or retain valued employees; or

•	incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.

Our inability or failure to manage our growth effectively could harm our business and materially and adversely affect our operating results and financial condition.

Competition may force us to shorten our product life cycles and more rapidly introduce new and enhanced products, which could have a material adverse effect on our results of operations.

We may become subject to litigation for infringing the intellectual property rights of others.

Others may initiate claims against us for infringing on their intellectual property rights. We may be subject to costly litigation relating to such infringement claims and we may be required to pay compensatory and punitive damages or license fees if we settle or are found culpable in such litigation. In addition, we may be precluded from offering products that rely on intellectual property that is found to have been infringed by us. We also may be required to cease offering the affected products while a determination as to infringement is considered. These developments could cause a decrease in our operating income and reduce our available cash flow, which could harm our business.

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We may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation of our business plan.

Our success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. If we fail to attract, train and retain sufficient numbers of these qualified people, our prospects, business, financial condition and results of operations will be materially and adversely affected. In particular, we are heavily dependent on the continued services of Mark Grannell, our Chief Executive Officer. Our success depends on our ability to attract, train and retain employees with expertise in developing, marketing and selling software solutions. In order to successfully market our products, we will need to retain, replace, and grow with additional engineering, technical support and marketing personnel. The market for such persons remains highly competitive and our limited financial resources will make it more difficult for us to recruit and retain qualified persons.

We face intense competition and may not have the financial and human resources necessary to keep up with rapid technological changes, which may result in our technology becoming obsolete.

The Internet and information security markets are subject to rapid technological change and intense competition. We compete with both established credit and debit card companies and a significant number of startup enterprises as well as providers of more traditional methods of payments. Most of our competitors have substantially greater financial and marketing resources than we do and may independently develop superior technologies, which may result in our technology becoming less competitive or obsolete. We may not be able to keep pace with this change. If we are unable to develop new applications or enhance our existing technology in a timely manner in response to technological changes, we will be unable to compete in our chosen markets. In addition, if one or more other biometric technologies such as voice, face, iris, hand geometry or blood vessel recognition are widely adopted, it may cause us delays in adapting our products and services to these other biometric form factors.

Our products may become obsolete due to rapid technological change within the industry.

Product technology evolves rapidly, making timely product innovation essential to success in the marketplace. The introduction of products with improved technologies or features may render our existing products obsolete and unmarketable. If we cannot develop products in a timely manner in response to industry changes, or if our products do not perform well, our business and financial condition will be adversely affected.

Risks Related To Our Common Stock

A Majority of our Common Stock is owned and controlled by William P. Moore, our Chairman, which will limit your ability to voice your opinion on corporate matters over which you will effectively have no vote.

CIP, LLC, our majority shareholder, of which our Chairman, William P. Moore is a control person, currently owns approximately 69.1% of our issued and outstanding common stock. Since CIP, LLC controls more than 50% of our issued and outstanding common stock, you effectively have no vote in how we conduct our corporate affairs.

Applicable SEC Rules governing the trading of “penny stocks” limits the trading and liquidity of our common stock, which may affect the trading price of our common stock.

Our common stock currently trades on the OTC Bulletin Board. Since our common stock trades below $5.00 per share, our common stock is considered a “penny stock” and is subject to SEC rules and regulations, which impose limitations upon the manner in which our shares can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

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We do not intend to pay dividends in the foreseeable future.

We have never declared or paid a dividend on our common stock. We intend to retain earnings, if any, for use in the operation and expansion of our business and, therefore, do not anticipate paying any dividends on our common stock in the foreseeable future.

The trading price of our common stock may be volatile.

The trading price of our shares has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth in this Report as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the biometrics and access control industries, and other events or factors. In recent years broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future-trading price of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company’s office is located at 10801 Mastin, Suite 920, Bldg # 8, Overland Park, Kansas 66210. We believe that our office space if sufficient for our current operations and is being provided at no cost.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of our business. We are not currently a part to any legal proceedings.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of and Dividends on Common Equity and Related Shareholder Matters.

Our common stock was listed for trading on the OTC Bulletin Board (“OTCBB”) operated by the Financial Industry Regulatory Authority (FINRA) on December 26, 2008 under the symbol “NCRG.” On September 30, 2010 the Company formally changed its name from Nicaragua Rising, Inc. to Ceelox, Inc. and coincidently received a new trading symbol, “CELO.” Below are the high and low quarterly sales information relating to trading in our common stock during our fiscal years ended December 31, 2012 and 2011.

We have never paid a cash dividend on our common stock and we have no present intention to declare or pay cash dividends on our common stock in the foreseeable future. We intend to retain any earnings which we may realize in the foreseeable future to finance our operations. Future dividends, if any, will depend on earnings, financing requirements and other factors.

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Fiscal Year
2012		High	Low
	Fourth Quarter: 10/1/12 to 12/31/12	$0.03	$0.00
	Third Quarter: 7/1/12 to 9/30/12	$0.01	$0.00
	Second Quarter: 4/1/12 to 6/30/12	$0.02	$0.01
	First Quarter: 1/1/12 to 3/31/12	$0.06	$0.02
2011		High	Low
	Fourth Quarter: 10/1/11 to 12/31/11	$0.05	$0.02
	Third Quarter: 7/1/11 to 9/30/11	$0.50	$0.02
	Second Quarter: 4/1/11 to 6/30/11	$0.56	$0.29
	First Quarter: 1/1/11 to 3/31/11	$1.01	$0.36

The Company considers its common stock to be “thinly traded” and any reported sale prices may not be a true market-based valuation of its common stock. Some of the bid quotations from the OTC Bulletin Board set forth above may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

ITEM 6. SELECTED FINANCIAL DATA

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

ITEM 7.

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

This section of this annual 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 originally formed for the purpose of developing and marketing advanced fingerprint 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. We commenced marketing our products in the first half of 2007 following more than three years of technology and product development. We have invested over $12 million in the operations of the business including research and development, product development and marketing of our products.

As announced on Form 8-K filed with the SEC on January 27, 2012, Ceelox completed the fulfillment of the demand notice from CIP, LLC. In this agreement, Ceelox converted over $8 million in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. Since that time Ceelox has continued development of its business plan surrounding virtual credit card, social networking, and mobile, security. Ceelox will continue to seek merger and acquisition candidates with synergies within these areas. Ceelox is currently in discussions with CIP and will seek to license and/or purchase the intellectual property from CIP as appropriate to complete their new product rollout.

During the fourth quarter of 2012, the Company announced two purchase agreements.

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·	As announced on Form 8-K filed with the SEC on December 3, 2012, on November 27, 2012, the Company entered into an asset purchase agreement (“Agreement” or “Asset Sale”) with AllCom, a Nevada corporation (“AllCom” or “Seller”).

Both transactions are expected to close during the second quarter of 2013.

Results of Operations

Net Revenue

For the years ended December 31, 2012 and 2011 the Company had revenues of $0 and $21,101, respectively. The decrease in sales is a result of the Company’s focus on continued product development and securing funding to execute its business plan and complete the acquisitions of iTeknik and AllCom.

Total Operating Costs and Expenses

Our total costs 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 $854,448 or 58% for the year ended December 31, 2012 from the year ended December 31, 2011. The decrease in Operating Costs and Expenses was due to a decrease of $700,109 or 53% in marketing, general and administrative expenses.

Loss from Operations

Our operating loss for the year ended December 31, 2012 was $620,071 compared to a loss of $1,453,418 for the year ended December 31, 2011. The decreased loss from operations of $833,347 or 57% was due largely to focus on product development and pursuit of funding to execute our business plan.

Interest Expense

Interest expense and related financing fees for the year ended December 31, 2012 was $153,288 compared to $268,823 for the year ended December 31, 2011, a decrease of $115,535 or 43%. In August 2005, Ceelox of Florida, a majority owned subsidiary of the Company, entered into a convertible note from a related party totaling $300,705 (see footnote 5 of the Company’s financial statements). Interest on that note was $3,141 for the year ended December 31, 2012 compared to $45,739 for the same period in 2011. In February 2010, the Company issued convertible notes to a related party totaling $450,000 (see footnote 7 of the Company’s financial statements) which contributed $1,980 additional interest expense. Between December 2009 and February 2010, the Company issued convertible bridge loan notes totaling $626,735, of which $350,000 was converted in February 2010. Interest expense on these notes was $12,919 for the year ended December 31, 2011. Of the $12,919 in interest expense, $12,381 is related to accrued interest and $538 is related to debt discount. In 2011, the Company issued promissory notes to a related party in the aggregate amount of $626,824. Interest expense for the year ended December 31, 2012 related to these related party promissory notes amounted to $725. In February 2012, the Company issued a convertible promissory note in the amount of $187,500. Interest expense for the year ended December 31, 2012 related to the amortization of debt discount and deferred finance fees on this note totaled $116,256. Additionally, in May 2012, the company issued a convertible promissory note in the amount of $125,000, which contributed to the remaining interest of $17,017.

Net Loss

During the year ended December 31, 2012 and 2011 the Company incurred net losses of $594,249 and $1,722,241 respectively. The decreased losses of $1,127,992 were primarily due to a reduction in workforce expenses while seeking additional funding for its business plan.

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Liquidity and Capital Resources

As of December 31, 2012, we had a working capital deficit of $1,237,683 as compared to a working capital deficit of $10,115,840 as of December 31, 2011. 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 $464,238 during the year ended December 31, 2012 was primarily a result of our $594,249 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 $961,165 during the year ended December 31, 2011 was primarily a result of our $1,722,241 net loss reconciled with our net non-cash expenses relating to stock-based compensation expense, accrued interest, and depreciation and amortization expense

Investing Activities

During the year ended December 31, 2012 and December 31, 2011 we expended $0 and $0, respectively.

Financing Activities

During the year ended December 31, 2012, we generated proceeds of $462,015 from our financing activities which consisted of: (i) proceeds from notes payable of $361,897, (ii) proceeds from the secured convertible note in the amount of $104,625, and (iii) payments on a notes payable related party in the amount of $4,506.

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.

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. On an ongoing basis, management evaluates its estimates and judgment, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation. Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements are set forth in Note 3 to our audited financial statements.

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Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results 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.

Accounts Receivable and Allowance for Doubtful Accounts

The Company carries its accounts receivable at cost less an allowance for doubtful accounts. The allowance for doubtful accounts is determined using a combination of factors to ensure that trade and unbilled receivables balances are not overstated due to uncollectibility. The Company performs ongoing customer credit evaluation within the context of the industry in which it operates, does not require collateral, and maintains allowances for potential credit losses on customer accounts when deemed necessary. A specific allowance for a doubtful account up to 100% of the invoice will be provided for any problematic customer balances. Delinquent account balances are written-off after management has determined that the likelihood of collection is not possible.

Inventory

Inventories consist of computer equipment merchandise that is in its finished form and ready for sale to end-user customers. Inventories are recorded at the lower of average cost or market. In-bound freight-related costs from our vendors are included as part of the net cost of merchandise inventories. Other costs associated with acquiring, storing and transporting merchandise inventories are expensed as incurred. Our inventories are acquired and carried for retail sale and, accordingly, the carrying value is susceptible to, among other things, market trends and conditions and overall customer demand. We use our best estimates of all available information to establish reasonable inventory quantities. However, these conditions may cause our inventories to become obsolete and/or excessive. We review our inventories periodically for indications that reserves are necessary to reduce the carrying values to the lower of cost or market values. For the year ended December 31, 2012, the Company determined that no reserve was necessary.

Property and Equipment

Computer equipment, computer software and furniture and fixtures are stated at cost and depreciated on a straight-line basis over an estimated useful life of five years. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the related gain or loss is included in results from operations.

Software Development Costs, Patents and Trademarks

The Company capitalizes certain direct software development costs based upon stages of development. Capitalization of software development costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalization ceases upon the products market introduction. Amortization of software development cost is computed on an individual product basis on the straight-line method over the estimated economic life ranging from three to five years, and begins when a product is available for general release to customers.

Patents and trademarks costs consist of internal and external costs relating to the filing patents and costs of licensing trademarks. Patent and trademark costs are recorded at cost and amortized on a straight-line basis over ten years, the expected period of future utility and economic benefit.

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Impairment of Long-Lived Assets and Other Intangible Assets

The Company evaluates the recoverability of long-lived assets with finite lives in accordance with ASC 350. Intangible assets, including purchased technology and other intangible assets, are carried at cost less accumulated amortization. Finite-lived intangible assets are being amortized on a straight-line basis over their estimated useful lives of five to ten years. ASC 350 requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value amount of an asset may not be recoverable. An impairment charge is recognized in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. A significant impairment of finite-lived intangible assets could have a material adverse effect on the Company’s financial position and results of operations. As further discussed in Note 5, for the year ended December 31, 2011 management recorded a loss on assets of $84,566.

The Company also assesses the impairment of long-lived assets in accordance with ASC 360, Property, Plant and Equipment, when circumstances indicate that the carrying value may not be recoverable. The Company determines if impairment has occurred through adverse changes. When it is determined that the estimated future cash flows of an asset will not be sufficient to recover its carrying amount, an impairment loss must be recorded to reduce the carrying amount to its estimated fair value. As discussed further in Note 4 of the accompanying consolidated financial statements, for the year ended December 31, 2011, management recorded a loss on assets of $8,677.

Revenue Recognition

Overview

We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is reasonably assured. If any of these criteria are not met, we defer recognizing the revenue until such time as all criteria are met. Determination of whether or not these criteria have been met may require us to make judgments, assumptions and estimates based upon current information and historical experience.

The Company markets its software products direct to commercial customers, to Value Added Resellers and Systems Integrators and to Original Equipment Manufacturers (“OEM”). Revenue may have four components: 1) license software revenue which provides a right to use Ceelox software products on a per seat/client or per server basis for an unlimited period; 2) software maintenance, 3) hardware, such as fingerprint readers and flash memory devices, and 4) professional services, primarily installation support. The Company also performs custom software development on a limited basis when necessary to support significant account or revenue opportunities.

The Company has developed suggested retail pricing for all revenue components which include volume related discounting where appropriate. In addition the Company may negotiate prices on an individual case basis for significant volume or significant account opportunities.

Hardware and Software Revenue

The Company recognizes hardware revenue upon invoicing. Invoicing is triggered upon shipping. In products that have a hardware and software component that is not broken out in the Company’s pricing, that includes hardware in the form of flash memory, the Company considers the value of the hardware to be de minimis and records the sale under the Software/Hardware classification.

Software License Revenue

License software revenue is recognized at the time of invoicing. Invoicing is timed with shipment or delivery of licensed software. The Company warrants that its software is free from material defects and will replace any defective products with a functional replacement.

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Maintenance includes customer access to and right to software bug fixes and new releases of the company’s software. These releases are made available to customers who download releases at their discretion. The Company’s licensed software includes first-year maintenance. Subsequent year maintenance is offered, at a percentage of the initial software license revenue, on an annual basis on the anniversary of the original purchase date. When deemed material, this revenue is amortized over the life of the license agreement on a straight-line basis.

Contract Revenue

Professional Services: Our customers occasionally request professional services support related to server installation support. The Company recognizes professional services revenue at the time the support is provided. Billing is on a rate per day basis.

Custom Software Development: Revenues from multi-element arrangements are allocated to the individual elements based upon relative fair values using vendor-specific objective evidence of fair value. Revenues received from customers where all revenue recognition criteria have not been established are deferred until such criteria have been achieved.

Research and Development

The Company expenses research and development costs as they are incurred.

Advertising and Marketing Costs

The company expenses advertising and marketing costs as they are incurred.

Stock-Based Compensation and Equity Incentive Plans

For the years ended December 31, 2012 and 2011, the Company maintained a stock plan covering equity grants including stock options and warrants.

The Company accounts for stock-based compensation in accordance with ASC 718. The standard requires the measurement and recognition of compensation expense in the Company’s statement of operations for all share-based payment awards made to the Company’s employees, directors and consultants including employee stock options, non-vested equity stock and equity stock units, and employee stock purchase grants. Stock-based compensation expense is measured at grant date, based on the estimated fair value of the award, reduced by an estimate of the annualized rate of expected forfeitures, and is recognized as expense over the employees’ expected requisite service period, generally using the straight-line method. In addition, ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under previous accounting rules. Ceelox Inc.’s forfeiture rate represents the historical rate at which Ceelox Inc.’s stock-based awards were surrendered prior to vesting. ASC 718 requires forfeitures to be estimated at the time of grant and revised on a cumulative basis, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Computation of (Loss) Per Share

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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 25,372,824 and 25,372,824 of potentially dilutive options, warrants and convertible debt instruments at December 31, 2012 and 2010, respectively.

	For the Years Ended
	2012	2011
Potentially dilutive options	2,181,111	2,181,111
Potentially dilutive warrants	7,129,783	6,254,783
Potentially dilutive convertible instruments	3,357,701	16,841,984
	12,668,595	25,277,878

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK.

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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CEELOX, INC. AND SUBSIDIARY

TABLE OF CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-1

CONSOLIDATED FINANCIAL STATEMENTS
	Balance Sheets	F-2
	Statements of Operations	F-3
	Statements of Stockholders’ Deficit	F-4
	Statements of Cash Flows	F-5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		F-6

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Ceelox, Inc.

We have audited the accompanying consolidated balance sheets of Ceelox, Inc. and Subsidiary (collectively the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the two-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ceelox, Inc. and Subsidiary as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the two-year period then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has negative working capital and a stockholders’ deficit, significant current and cumulative losses and negative operating cash flows. Furthermore, the Company’s cash and working capital positions as of December 31, 2012 are not sufficient to complete its planned activities for the upcoming year. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Rothstein Kass

Dallas, Texas

April 15, 2013

F-1

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CEELOX, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	December 31, 2012			December 31, 2011

ASSETS
Current assets:
Cash	$	4,718		$	6,940
Prepaids and other current assets		11,336			17,628
Total current assets	$	16,054		$	24,568


LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities	$	404,896		$	387,289
Advances, related party					7,833,128
Notes payable		445,525
Notes payable, related party		119,093			628,421
Convertible notes payable, related party					960,185
Convertible note – bridge loans ($0 and $155,634 due to stockholders as of December 31, 2012 and 2011, respectively)		188,489			331,385
Secured convertible note		87,034
Derivative liabilities		8,700
Total current liabilities		1,253,737			10,140,408


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: 38,547,556 and 14,147,556 shares issued and outstanding as of December 31, 2012
and 2011, respectively		386			142
Additional paid-in capital		25,349,256			15,877,094
Accumulated deficit		(26,213,935	)		(25,639,942	)
Non controlling interests		(373,390	)		(353,134	)
Total stockholders’ deficit		(1,237,683	)		(10,115,840	)
Total liabilities and stockholders’ deficit	$	16,054		$	24,568

See Notes to Consolidated Financial Statements

F-2

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CEELOX, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Years Ended
	December 31, 2012			December 31, 2011

Revenue:
Hardware and software	$			$	1,374
Licensing					19,727
Total Revenue					21,101


Operating costs and expenses:
Costs of hardware sales					5,130
Marketing, general and administrative		620,071			1,320,180
Depreciation and amortization					19,474
Loss on disposal of assets					129,735
Total costs and expenses		620,071			1,474,519

Operating loss		(620,071	)		(1,453,418	)

Other income (expenses):
Interest and amortization of financing fees		(152,978	)		(268,823	)
Derivative income		178,800
Total other expenses		25,822			(268,823	)

Net loss	$	(594,249	)	$	(1,722,241	)

Less: Net loss attributable to non-controlling interest		20,256			57,986


Net loss attributable to common stockholders	$	(573,993	)	$	(1,664,255	)

Basic and diluted loss per share	$	(0.02	)	$	(0.14	)

Weighted average shares basic and diluted		36,923,029			11,885,723

Stock-based compensation:
Payroll and related benefits	$	7,000		$	13,483
Consulting	$			$	127,125
Legal Fees	$			$	80,000

See Notes to Consolidated Financial Statements

F-3

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CEELOX, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

	Number of Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Non-Controlling Interest			Total
BALANCE at January 1, 2011		11,383,673	$	114	$	15,594,014	$	(23,975,687	)	$	(295,148	)	$	(8,676,707	)

Stock-based compensation						13,483								13,483

Issuance of common stock for services		2,763,883		28		269,597								269,625

Net loss for the year ended December 31, 2011								(1,664,255	)		(57,986	)		(1,722,241	)

BALANCE at December 31, 2011		14,147,556	$	142	$	15,877,094	$	(25,639,942	)	$	(353,134	)	$	(10,115,840	)

Issuance of common stock for services		400,000		4		6,996								7,000

Conversion of related party debt into common stock		24,000,000		240		9,460,216								9,460,456

Warrants issued in connection with notes payable financing						4,950								4,950

Net loss for the year ended December 31, 2012								(573,993	)		(20,256	)		(594,249	)

BALANCE at December 31, 2012		38,347,556	$	386	$	25,349,256	$	(26,213,935	)	$	(373,390	)	$	(1,237,683	)

See Notes to Consolidated Financial Statements

F-4

-24-

CEELOX, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended
	December 31, 2012			December 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss:	$	(594,249	)	$	(1,722,241	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation expense to consultants and employees		7,000			220,608
Depreciation and amortization					19,474
Amortization of financing fees		812
Amortization of debt discount		91,983
Derivative income		(178,800	)
Loss on disposal of assets					129,735
Effect on cash of changes in operating assets and liabilities:
Accounts receivable					7,206
Inventory					(817	)
Prepaids and other current assets		75,170			25,870
Accounts payable and accrued liabilities		133,849			359,000
NET CASH USED IN OPERATING ACTIVITIES		(464,235	)		(961,165	)

CASH FLOW FROM FINANCING ACTIVITIES:
Payments on notes payable - related party		(4,506	)
Advances from related party					385,552
Proceeds from notes payable		361,897
Proceeds from notes payable, related party					556,824
Proceeds from issuance of convertible note – bridge loans		104,625
NET CASH PROVIDED BY FINANCING ACTIVITIES		462,015			942,376

NET INCREASE (DECREASE) IN CASH		(2,220	)		(18,789	)
CASH:
Beginning of period		6,940			25,729
End of period	$	4,718		$	6,940

Supplemental disclosure of non-cash investing and financing activities:

Advance – Expenses paid by related party				$	70,000
Shares issued in satisfaction of related party debt	$	9,464,596		$
Discount on notes payable	$	4,138		$
Deferred financing fees resulting from issuance of secured convertible note	$	70,456		$

See Notes to Consolidated Financial Statements

F-5

-25-

CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

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 shareholders of Ceelox Private, the Company and the Company’s majority shareholder, 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 13 for a more detailed discussion of the Nicaragua-Ceelox Private Share Exchange.

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 years ended December 31, 2012 and 2011, the Company was engaged in continued development of our business plan surrounding virtual credit card, social networking and mobile, security and continues to seek merger and acquisition candidates with synergies within these areas. As indicated in the accompanying consolidated financial statements, at December 31, 2012 and 2011, the Company had $4,718 and $6,940 in cash, respectively, and $1,237,683 and $10,115,840 in negative working capital, respectively. For the years ended December 31, 2012 and 2011, the Company had a net loss of $594,249 and $1,722,241, respectively, and utilized $464,238 and $961,165, respectively, in cash from operations. 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, 2013. No adjustment has been made in the accompanying 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.

License and Intellectual Property

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 would 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

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

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

License and Intellectual Property (continued)

As announced on Form 8-K filed with the SEC on January 27, 2012, Ceelox completed the fulfillment of the demand notice from CIP, LLC. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. Since that time Ceelox has continued development of its business plan surrounding virtual credit card, social networking, and mobile, security. Ceelox will continue to seek merger and acquisition candidates with synergies within these areas. Ceelox is currently in discussions with CIP and will seek to license and/or purchase the intellectual property from CIP as appropriate to complete their new product rollout.

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 December 31, 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 shared office space with a related party at 10801 Mastin, Suite 920, Bldg # 8, Overland Park, Kansas 66210.

Employee Furlough

During the July 2011 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 Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with Regulation S-X of the Securities and Exchange Commission (“SEC”). All material inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

F-7

-27-

CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

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

Fair Value of Financial Instruments

Revenue Recognition

Overview

The Company markets its software products direct to commercial customers, to Value Added Resellers and Systems Integrators and to Original Equipment Manufacturers (“OEM”). Revenue may have four components: 1) license software revenue which provides a right to use the Company software products on a per seat/client or per server basis for an unlimited period; 2) software maintenance 3) hardware, such as fingerprint readers and flash memory devices and 4) professional services, primarily installation support. The Company also performs custom software development on a limited basis when necessary to support significant account or revenue opportunities.

Hardware and Software Revenue

The Company recognizes hardware revenue upon invoicing. Invoicing is triggered upon shipping. In products that have a hardware and software component that is not broken out in the Company’s pricing, such as with Ceelox Portable Vault that includes hardware in the form of flash memory, the Company considers the value of the hardware to be de minimis and records the sale under the Software/Hardware classification.

Software License Revenue

F-8

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

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

Research and Development

The Company expenses research and development costs as they are incurred.

Advertising and Marketing Costs

The Company expenses advertising and marketing costs as they are incurred. Such costs for the years ended December 31, 2012 and 2011 amounted to approximately $0 and $46,000, respectively.

Stock-Based Compensation and Equity Incentive Plans

For the years ended December 31, 2012 and 2011, the Company maintained a stock plan covering equity grants including stock options and warrants. (See Note 16, “Equity Incentive and Stock-Based Compensation Plan,” for a detailed description of the Company’s plans.)

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. The standard requires the measurement and recognition of compensation expense in the Company’s consolidated statement of operations for all share-based payment awards made to the Company’s employees, directors and consultants including employee stock options, non-vested equity stock and equity stock units, and employee stock purchase grants. Stock-based compensation expense is measured at grant date, based on the estimated fair value of the award, reduced by an estimate of the annualized rate of expected forfeitures, and is recognized as expense over the employees’ expected requisite service period, generally using the straight-line method. In addition, ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under previous accounting rules.

The Company’s forfeiture rate represents the historical rate at which the Company’s stock-based awards were surrendered prior to vesting. ASC 718 requires forfeitures to be estimated at the time of grant and revised on a cumulative basis, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Computation of (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares outstanding during the period. 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 12,668,595 and 25,277,878 of potentially dilutive options, warrants and convertible debt instruments at December 31, 2012 and 2011, as shown below:

F-9

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

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

Computation of (Loss) Per Share (continued):

	For the Years Ended
	2012	2011
Potentially dilutive options	2,181,111	2,181,111
Potentially dilutive warrants	7,129,783	6,254,783
Potentially dilutive convertible instruments	3,357,701	16,841,984
	12,668,595	25,277,878

Non-controlling Interest Ceelox Private

Certain shareholders of Ceelox Private did not participate in the Merger and share exchange between Nicaragua and Ceelox Private (see Note 13). At December 31, 2012 and 2011, these shareholders are recorded as non controlling interests in the consolidated financial statements. Details of changes in the non controlling interests are reflected in the consolidated statements of stockholders’ deficit.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

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 consolidated financial statements.

4. Property and Equipment

Depreciation expense for the years ended December 31, 2012 and 2011 amounted to $0 and $3,227, respectively.

The office equipment and furniture was abandoned on July 31, 2011 when the Company did not renew the lease agreement at 13976 Lynmar Blvd, Tampa, Florida 33626, and moved its offices to 10801 Mastin, Suite 920, Bldg # 8, Overland Park, Kansas 66210. As a result of the abandonment, the Company recorded a loss on disposal of office equipment and furniture in the amount of $8,677 during the year ended December 31, 2011.

5. Software Development Costs, Patents, and Trademarks

Amortization expense for the years ended December 31, 2012 and 2011 amounted to $0 and $16,247, respectively.

During the year ended December 31, 2011, the Company recorded a loss on disposal of software development costs, patents and trademarks in the amount of $84,566 to equal the full amount of the carrying value. The impairment charge resulted from the fact that on January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the assets of Ceelox that secured the note (the “Collateral”) to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,368 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock. Consequently, at December 31, 2011, management did not believe there was a future economic benefit to these assets based on CIP’s intentions.

F-10

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

6. Advances from Related Party

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 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.

During the years ended December 31, 2012 and 2011, the Company received advances of $0 and $385,552, respectively, under this agreement. Interest accrued for the years ended December 31, 2012 and 2011 amounted to $0 and $96,388, respectively.

Total advances including the reacquisition fee, which is being treated as interest expense, amounted to $0 and $7,833,128 as of December 31, 2012 and 2011, respectively.

On January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,927 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. As a result, all of the advances from related party were converted.

7. 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. Interest expense for the years ended December 31, 2012 and 2011 amounted to $3,141 and $45,739, respectively.

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. Under this agreement, the note was convertible into common stock at $0.81 per share. Interest expense for the years ended December 31, 2012 and 2011 amounted to $1,540 and $22,420, respectively. On February 12, 2011 the term of the note was modified from February 10, 2011 to ‘on demand by the holder’.

F-11

-31-

CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

7. Convertible Notes Payable - Related Party (continued)

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. Under this agreement, the note was convertible into common stock at $0.81 per share. Interest expense for the years ended December 31, 2012 and 2011 amounted to $440 and $6,406, respectively. On February 12, 2011 the term of the note was modified from February 10, 2011 to ‘on demand by the holder’.

On January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,927 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock to CIP. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. As a result, all of the convertible notes payable – related party was converted into common stock.

At December 31, 2012 and 2011, the carrying value of convertible notes payable due to related parties consisted of the following:

	Principal			Accrued Interest			Balance
Balance January 1, 2011	$	750,705		$	134,915		$	885,620
Interest accrued December 31, 2011		-			74,565			74,565
Balance December 31, 2011		750,705			209,480			960,185
Interest accrued January 24, 2012		-			5,121			5,121
Notes converted at January 24, 2012		(750,705	)		(214,601	)		(965,306	)
Balance December 31, 2012	$	-		$	-		$	-

8. 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”).

F-12

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

8. Convertible Notes Payable – Bridge Loans (continued)

The notes are convertible, at the holder’s option, into Ceelox Private’s Common Stock or in connection with a Reverse Merger such public company’s common stock in accordance with certain terms of the agreement at $0.81 per share of the Company’s Common stock.

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.

During the year ended December 31, 2011, 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 years ended December 31, 2012 and 2011, Ceelox Private recorded amortization of discounts in the amount of $538 and $11,875 related to unconverted instruments, respectively. As of December 31, 2012 and 2011, the carrying amounts of convertible bridge notes were $188,489 and $331,385, net of $0 and $538 in un-amortized discount, respectively.

On January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,927 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. As a result, $156,352 of the convertible notes payable – bridge loans were converted. As of December 31, 2012, $188,489 of the convertible notes payable – bridge loans are considered in default.

9. 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 years ended December 31, 2012 and 2011 amounted to $40 and $462, respectively.

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 years ended December 31, 2012 and 2011 amounted to $134 and $1,025.

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. Interest expense for the years ended December 31, 2012 and 2011 amounted to $261 and $110.

On December 31, 2011, Ceelox issued a promissory note to a related party in the amount of $73,947. 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 years ended December 31, 2012 and 2011 amounted to $413 and $0.

F-13

-33-

CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

9. Notes Payable – Related Party (continued)

On January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,761 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. As a result $505,670 of the notes payable – related party was converted.

10. Secured Convertible Note Financing

As reported in the Company’s Form 8-K filed with the SEC on February 22, 2012: On February 16, 2012 the Company entered into a securities purchase agreement with one investor for the purchase and sale of a convertible promissory note (“Note”) in the principal amount of $187,500 and a warrant to purchase shares of the Company’s common stock. The number of warrant shares exercisable is equal to the number of shares equal to 20% of the quotient obtained by dividing (i) the principal amount of the Note ($187,500) by (ii) the Conversion Price of the Company’s common stock. Additionally, the Company entered into a security agreement with the investor whereby the Company’s obligation to repay the Note is secured by all of the Company’s assets.

After the payment of fees, expenses and the prepayment of interest, the Company received net proceeds of $104,625.

Pursuant to the terms of the Note, the maturity date of the Note is February 16, 2013 (“Maturity Date”) and all of the interest due under the Note during the initial term was prepaid by the Company upon issuance of the Note. Upon the earlier of the completion of a Qualified Offering, or the Maturity Date, the investor shall have the right to convert the Note into shares of the Company’s common stock. The number of shares into which the Note may be converted shall be determined by dividing the conversion amount of the Note by the conversion price. The conversion price shall be determined as follows: (i) a 25% discount from the price per share (denominated in US dollars) at which the common stock is sold in a Qualified Offering (such price at which the common stock is sold in a Qualified Offering is referred to as the “Offering Price”) if the Qualified Offering occurs on or before the six (6) month anniversary of the final Closing Date; (ii) a 40% discount from the Offering Price if a Qualified Offering occurs after the six (6) month anniversary of the final Closing Date but on or before the twelve (12) month anniversary of the final Closing Date; or (iii) the greater of (x) a 40% discount from the VWAP of the common stock over the five (5) trading days prior to conversion, and (y) $0.10 per share if a Qualified Offering does not occur on or prior to the twelve (12) month anniversary of the final Closing Date. For purposes hereof, the final Closing Date shall be the earlier of February 28, 2012 and the sale of an aggregate of $500,000 principal amount of the Notes. As of December 31, 2012, this note is in default. However, the Company is in negotiations with a third party to secure financing in which part of the use of proceeds will be to repay the Note.

The Company issued a five year warrant to the investor pursuant to which the investor shall have the right to acquire additional shares of the Company’s common stock. The number of shares of common stock issuable upon exercise of the warrant shall be determined by dividing the principal amount of the Note by the Conversion Price (as defined above pursuant to the Note) multiplied by twenty percent (20%). Subsequent to December 31, 2012, the Company is in default in repayment of the note. However, the Company is in negotiation with a third party to secure financing in which part of the use of the proceeds will be used to repay the note.

F-14

-34-

CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

10. Secured Convertible Note Financing (continued)

Accounting for the Secured Convertible Notes

We have evaluated the terms and conditions of the secured convertible note and warrants under the guidance of ASC 815, Derivatives and Hedging. Both the embedded conversion feature and detachable warrants have a variable conversion price, which precludes these instruments from being indexed to the Company’s own stock. As a result, both the embedded conversion feature and warrants require classification as liabilities.

The following tables reflect the allocation of the purchase on the financing dates:

	$187,500
Secured Convertible Note	Face Value
Proceeds	$	104,625
Embedded conversion feature		(251,852)
Warrant derivative liability		(55,370)
Prepaid interest		24,375
Deferred finance fees		58,500
Carrying value	$	-

Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is lower than face value. Discounts (premiums) are amortized through charges (credits) to interest expense over the term of the debt agreement.

For the year ended December 31, 2012, the Company recorded interest expense related to the amortization of debt discount in the amount of $87,034. The carrying value of the secured convertible note at December 31, 2012 was $87,034.

11. Derivative Financial Instruments

The components of warrant derivative liability as reflected in the condensed consolidated balance sheet as of December 31, 2012:

	December 31, 2012
Secured convertible note financing giving rise to derivative financial instruments:	Indexed Shares	Fair Value
Embedded conversion feature	3,125,000	$	2,488
Warrant derivative liability	625,000		6,212
Carrying value	3,750,000	$	8,700

F-15

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

11. Derivative Financial Instruments (continued)

The following table summarizes the effects on our gain (loss) associated with changes in the fair values of our derivative financial instruments by type of financing for the year ended December 31, 2012:

Secured convertible note financing giving rise to derivative financial instruments and the income effect:	Year Ended December 31, 2012
Embedded conversion feature	$	249,364
Warrant derivative liability		49,158
		298,522

Day-one derivative loss		(119,722)
Total derivative gain (loss)	$	178,800

12. Fair Value Considerations

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

Level 1 valuations:		Quoted prices in active markets for identical assets and liabilities.
Level 2 valuations:		Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similarassets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
Level 3 valuations:		Significant inputs to valuation model are unobservable.

We follow the provisions of ASC 820, Fair Value Measurements and Disclosures, with respect to our financial instruments. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments which are required to be measured at fair value on a recurring basis under of ASC 815 are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As of December 31, 2011 there was no assets or liabilities measured at fair value.

F-16

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

12. Fair Value Considerations (continued)

The following table presents information about the Company’s liabilities measured at fair value as of December 31, 2012:

	Fair Value Measurements Using:
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Assets (Liabilities) at Fair Value
Warrant Derivative liabilities	$	-	$	-	$	6,212	$	6,212
Embedded Conversion Feature						2,488		2,488
Total	$	-	$	-	$	8,700	$	8,700

Both the embedded conversion feature and warrants were valued using a binomial-lattice-based valuation model. The lattice-based valuation technique was utilized because it embodies all of the requisite assumptions (including the underlying price, exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weighted to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock. Because derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

Significant assumptions in valuing the embedded conversion feature (“ECF”) and warrant liability were as follows as of December 31, 2012:

	ECF			Warrants
Exercise price	$	0.06		$	0.06
Volatility		338.16	%		309.62	%
Equivalent term (years)		0.13			4.13
Risk-free interest rate		0.05	%		0.62	%

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

12. Fair Value Considerations (continued)

The following table sets forth a reconciliation of changes in the fair value of financial liabilities classified as Level 3 in the fair valued hierarchy:

	Derivative Instruments
	2012
Balance as of January 1, 2012:	$
Total losses (realized or unrealized):
Included in earnings		298,522
Embedded conversion feature issuances		(251,852	)
Warrant issuances		(55,370	)
Balance as of December 31, 2012	$	(8,700	)

13. Notes Payable

On May 18, 2012, the Company sold a $125,000 convertible promissory note (“Note”) to an investor. In connection with the sale of the Note the Company also issued the investor a warrant to purchase shares of the Company’s common stock (“Warrant”). The Note is due and payable on November 18, 2012 and bears interest at a rate of 13% per annum, all of which shall be paid on the maturity date. The Company may prepay the Note and accrued interest in whole or in part at any time prior to the maturity date without penalty. An event of default shall occur in the event the Company fails to make the principal and interest payment to the investor on or prior to the maturity date. The Warrant issued to the investor allows the investor to acquire up to 250,000 shares of the Company’s common stock at a price of $0.10 per share for a period of five years from the date of issuance of the warrant. We have evaluated the terms and conditions of the warrants under the guidance of ASC 815, Derivatives and Hedging and determined that they achieved equity classification. The warrants did not contain any terms or feature that would preclude equity classification.

The purchase price allocation for the convertible notes resulted in a debt discount of $120,050. The discount on the notes will be amortized through periodic charges to interest expense over the term of the debenture using the effective interest method. Amortization of debt discount amounted to $3,278 during the nine month period ended September 30, 2012. The purchase price allocation is as follows:

	Inception
Net proceeds	$	125,000
Carrying value		(120,050	)
Paid in capital (warrants)		(4,950	)

The warrants were recorded as a discount to the note and will be accreted to face value over the life of the loan.

Between August 8, 2012 and December 31, 2012, the Company received additional tranches of funding related to the May 18, 2012 note agreement aggregating $308,458.

For the years ended December 31, 2012, the Company recorded $17,017 in interest expense related to this note.

F-18

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

14. Equity Activity

Warrants: The following table summarizes the activity related to warrants for the period from January 1, 2011 through December 31, 2012:

	Warrants	WAVG Strike Price
January 1, 2011	6,254,783	3.23
Granted	-	-
Exercised	-	-
Cancelled or expired	-	-
December 31, 2011	6,254,783	3.23
Granted	875,000	0.32
Exercised	-	-
Cancelled or expired	-	-
December 31, 2012	7,129,783	3.27
Exercisable at December 31, 2012	7,129,783	3.27

The warrants expire at various dates ranging from August 21, 2014 through May 18, 2017 and have an average exercise price of $1.42.

Investment Banking Agreement

On October 8, 2010, the Company entered into an 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 years ended December 31, 2012 and 2011, the Company recorded stock-based compensation of $52,125 and $62,500, respectively, related to this agreement. On March 1, 2011, the Company issued 150,000 shares for services rendered from August 2010 through July 2011.

On November 21, 2011 and revised on March 21, 2012, 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) 2,500,000 shares of common stock upon execution of the agreement and, (ii) $100,000 upon the closing of a bridge financing in the minimum amount of $1,500,000. The agreement states that in the event the funding is not completed, the firm will agree to defer the compensation until a funding is completed. The agreement is retroactive to July 1, 2011. During the years ended December 31, 2012 and 2011, the Company recorded stock-based compensation of $75,000 and $0, respectively, related to this agreement. On December 29, 2011, the Company issued 2,500,000 shares in connection with the agreement.

On February 21, 2012, the Company entered into an agreement with a firm for non-exclusive investment banking and financial advisory services. As consideration for these services, pursuant to the Agreement, the Company agreed to issue (i) 400,000 restricted common shares, payable in four equal quarterly installments beginning on the date of execution of this Agreement, (ii) fees associated with the raising of capital of 10% cash and 10% in warrants on equity-linked capital raised (i.e., common equity, preferred equity, convertible debt, debt with warrants), and 3% cash and no warrants on straight debt capital raised and (iii) fees associated with merger and acquisitions of 5% of the consideration up to $5 million, 3% of the consideration between $5-10 million, and 1% of consideration above $10 million. At the Company’s discretion, $5,000 may be paid in lieu of the restricted shares as quarterly compensation. The warrants will be struck at a 20% premium to the valuation of said financing event, have a five-year expiration, and have a cashless exercise feature. The term of the agreement is 12 months and can be terminated upon 10 days written notice without cause by either the Company or the firm at any time before the Expiration Date. For year ended December 31, 2012, $1,000 in consulting expenses has been incurred. On May 4, 2012, the Company issued 100,000 shares of common stock to an investing banking group in accordance with the terms of the agreement.

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

14. Equity Activity (continued)

On March 29, 2012, the company entered into an agreement with a firm to provide general financial advisory and M&A advisory services to the Company. The terms of the engagement, which is modified from the original agreement signed on December 1, 2011, are for a term of six (6) months which will commence on the closing of the current Ceelox agreement. The firm will serve as the Company’s non-exclusive financial advisor and to provide agreed upon general financial advisory and investment banking advisor services. As consideration for these services, the Company has agreed to compensate the firm as follows: (a) Sixty thousand dollars ($60,000) in the form of six (6) consecutive monthly payments of $10,000; (b) In the event that the firm identifies, negotiates, and acts as an advisor on a M&A assignment. Ceelox agrees to pay the greater of $75,000 or a fee equal to 5% of the first $5 million of Consideration paid, plus 3% of the second $5 million of Consideration paid, plus 1% of the Consideration paid thereafter (on any Acquirer or Acquiree Transaction) for any merger, asset sale, stock swap, or any transaction or combination other than the ordinary course of business, whereby, directly or indirectly, control of or an asset is transferred for any Consideration (defined below) including, without limitation, cash and/or non-cash consideration. Payment will be due upon closing of the transaction. The terms of this agreement do not commence until the completion of the March 21, 2012 agreement.

Legal Services Agreement

On January 21, 2012, the Company contracted with a legal firm to (i) assist the Company with a potential acquisition of target companies for asset acquisitions, (ii) assist the Company with a proposed private financing for which a $50,000 retainer was paid by the Company and (iii) assist the Company with a future acquisition. In exchange for services, the company will be billed at an hourly rate for work performed on behalf of the Company. The current hourly rates for firm personnel range from $390 to $895 for partners, from $225 to $545 for associates, $90 to $315 for paralegals, clerks and librarians, and other members of our staff. During the year ended December 31, 2012, the Company paid a $50,000 retainer for their use of services. The retainer was paid out of the proceeds of the secured convertible note financing dated February 16, 2012. $12,500 of which has been recorded as legal fees.

Placement Agent Agreement

On May 11, 2012, the Company entered into an agreement with a firm for exclusive placement agent agreement for the private placement of securities. As consideration for these services, pursuant to the Agreement, the Company agreed (i) to pay, at the signing of this agreement $25,000 cash, and 30 days from the signing of this agreement an additional $10,000 cash as a non-refundable retainer that is creditable to the placement fee described herein (ii) a cash fee payable upon each closing of a transaction closing equal to 10% of the gross proceeds received by the Company from sources of capital introduced by the placement agent (iii) a cash fee if the Company or any of its advisors or affiliates sources any capital investment into the Company equal to 4% of such gross proceeds (iv) pay placement agent a corporate finance fee payable in cash upon each closing equal to 2% of the gross proceeds (v) warrants to the placement agent to purchase shares of the Company’s common stock equal to 10% of the number of shares of common stock underlying the securities issued in the offering. Warrants will be issued at each closing and shall provide (a) be exercisable at an exercise price equal to the price of the securities issued to the investors in the offering, (b) expire five (5) years from the date of issuance, (c) contain anti-dilution protection provided to the investors, (d) same registration rights provided to the investors, and (e) provisions for cashless exercise. The term of the agreement is 6 months and can be terminated upon 30 days written notice without cause by either the Company or the placement agent at any time before the Expiration Date. The contract was not renewed or extended after the original contract term.

F-20

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

14. Equity Activity (continued)

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 December 31, 2012 and 2011, 3,818,889 shares of the 6,000,000 shares approved under the Company’s Plan remain available for grant.

General Stock Option Information

The following table summarizes stock option activity under 2007 Plan for the years ended December 31, 2012 and 2011, and information regarding stock options outstanding, exercisable, and vested and expected to vest as of December 31, 2012.

	Number of			Weighted Average		Weighted Average
	Options			Exercise Price		Contractual Term
Outstanding at January 1, 2011		2,279,430		$	0.27	4.65 years
Granted		195,000
Exercised		-
Cancelled/Forfeited		(293,319	)	$	0.54
Outstanding at December 31, 2011		2,181,111		$	0.27	4.65 years
Granted		-
Exercised		-
Cancelled/Forfeited		-
Outstanding at December 31, 2012		2,181,111		$	0.27	4.65 years

Range of Exercise Prices		Options O/S		Weighted Average Life (Years)		Weighted Average Price		Options Exercisable		Weighted Average Price
$	0.09 – 0.41		2,042,222		1.25	$	0.021		2,042,222	$	0.021
$	0.99		138,889		3.09	$	0.110		138,889	$	0.110

F-21

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

14. Equity Activity (continued)

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 December 31, 2012 and December 31, 2011, there was $0 and $0 of total unrecognized compensation cost, net of expected forfeitures, related to unvested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2 years and 4 years.

Stock-Based Compensation

Stock Options

During the years ended December 31, 2012 and 2011, the Company recorded stock-based compensation related to stock options of $0 and $13,483, respectively.

15. Income Taxes

Income tax benefit resulting from applying statutory rates in jurisdictions in which we are taxed (Federal and State of Florida) differs from the income tax provision (benefit) in our financial statements. The following table reflects the reconciliation for the years ended December 31, 2012 and 2011:

	Year Ended December 31,
	2012	2011
Benefit at federal and statutory rate	(34)%	(34)%
Change in valuation allowance	34 %	34 %
Effective tax rate	0 %	0 %

Deferred income taxes arise from temporary differences in the recognition of certain items for income tax and financial reporting purposes. The approximate tax effects of significant temporary differences which comprise the deferred tax assets and liabilities are as follows:

	Year Ended December 31,
		2012		2011
Net operating loss carry-forward	$	7,360,000	$	7,119,000
Property and equipment		-		-
Compensation arising from share-based payment		378,000		378,000
Amortization of intangible assets		-		-
Valuation allowance		(7,738,000)		(7,497,000)
Net deferred tax assets (liabilities)	$	-	$	-

F-22

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS (CONTINUED)

15. Income Taxes (continued)

As of December 31, 2012, we have $28,250,000 in net operating loss carry forward that, subject to limitation, may be available in future tax years to offset taxable income. The net operating loss carry forwards expire through 2032.

The amount of income taxes and related income tax positions taken are subject to audits by federal and state tax authorities. As of December 31, 2012, the Company’s most recently filed income tax return dates are as of December 31, 2011, and generally three years of income tax returns commencing with that date are subject to audit by these authorities. Our estimate of the potential outcome of any uncertain tax positions is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time, pursuant to ASC 740, Income Taxes. ASC 740 requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company’s policy is to record a liability for the difference between the benefit recognized and measured pursuant to ASC 740 and tax position taken or expected to be taken on the tax return. Then, to the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company reports tax-related interest and penalties as a component of income tax expense. During the periods reported, management of the Company has concluded that no significant tax position requires recognition under ASC 740.

16. Subsequent Events

On February 21, 2012, the Company entered into an agreement with a firm for non-exclusive investment banking and financial advisory services. On January 9, 2013, as consideration for these services, pursuant to the Agreement, the Company issued the final installment of 100,000 shares of common stock to an investing banking group.

F-23

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ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. 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, Mr. Grannell, our CEO, and Mr. Moore, our CFO, concluded that our Disclosure Controls were not effective as of the end of the period covered by this report. As of December 31, 2012 we do not believe that our disclosure controls and procedures were effective. The small size of our company does not provide for the desired separation of control functions, and we do not have the required closing process related to the preparation of consolidated financial statements. The potential remedies for this situation are described below.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of our internal control over financial reporting and determined that our internal control over financial reporting was ineffective as of December 31, 2012 due to material weaknesses. A material weakness in internal control over financial reporting is defined by the Public Company Accounting Oversight Board’s Audit Standard No. 5 as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting. Management’s assessment identified the following material weaknesses in internal control over financial reporting:

•

The small size of our Company limits our ability to achieve the desired level of separation our internal controls and financial reporting. We do have a separate CEO and CFO; however, we do not have an Audit Committee to review and oversee the financial policies and procedures of the Company. Until such time we are able to install an audit committee, we do not meet the full requirement for separation. In the interim, we will continue to strengthen the role of our CEO and CFO and their review of our internal control procedures.

•

The small size of our Company also limits our ability to achieve the desired level of closing process related to the preparation of consolidated financial statements to ensure that the Company identified and accumulated all required supporting information to ensure completeness and accuracy of the consolidated financial statements and that balances and disclosures reported in the consolidated financial statements reconciled to the underlying supporting schedules and accounting records. Management hopes to further mitigate the risk of material weakness going forward by utilizing external financial consulting services, in a more effective manner, prior to the review by our principal independent accounting firm to ensure that all information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the commission’s rules and forms.

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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.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

The following table sets forth the name, age and position of each of our officers, directors, director designees and key employees.

Name	Age	Position
Mark Grannell	51	Chief Executive Officer and Chief Operating Officer
William P. Moore	68	Chairman of the Board, Secretary, Treasurer and Chief Financial Officer

Mark Grannell became our Chief Executive Officer on September 15, 2011 and our Chief Operating Officer on February 12, 2010, in connection with our acquisition of Ceelox Private. Mr. Grannell joined Ceelox Private during the second quarter of 2008 as Chief Operating Officer bringing over 20 years engineering and management experience with Motorola, Sprint, Level 3, and SiriCOMM His career includes satellite, wireline and wireless telecommunication, data and voice design and engineering; business development; sales and executive-level management. Prior to joining Ceelox Private, Mr. Grannell’s career began at Motorola as a system engineer working on satellites. He then spent over twelve years, from 1989 to 2000, at Sprint where he enjoyed a steady progression of management responsibilities. Past duties at Sprint include direct responsibility over a $180M annual budget for national wireless network deployment including hardware and software design and a staff exceeding 250 people. After leaving Sprint, Mr. Grannell worked at Level 3 from 2002 to 2007 performing business development and sales functions. In January 2007, Mr. Grannell left Level 3 to become President and CEO of SiriCOMM, Inc. During the next 14 months Mr. Grannell oversaw network redesign and development of new network operations software resulting in 30% maintenance reduction and 60% data throughput performance improvement. SiriCOMM filed for U.S. federal bankruptcy protection in December 2007. Mr. Grannell earned his Bachelor of Science degree in Electrical Engineering from Kansas State University and his MS Electrical Engineering from the University of Missouri. He is an elected member of the Gardner/Edgerton Board of Education.

William P. Moore became our Secretary, Treasurer and Chief Financial Officer on September 15, 2011. He has been Chairman of the Board of the Company since November 5, 2009. Prior to our acquisition of Ceelox Private, Mr. Moore was the President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company since November 5, 2009. Since 1994, Mr. Moore has been a co-owner, director and secretary of Continental Coal Inc., a privately-held surface mining company operating in Kansas and Missouri. Mr. Moore received his Bachelor of Science degree from the United States Military Academy at West Point and a Master of Business Administration degree from Harvard University.

ITEM 11. EXECUTIVE COMPENSATION

Executive Compensation

The following table sets forth information concerning all compensation paid to the Company’s Executive Officers for services to the Company in all capacities for each of the two years ended December 31 indicated below.

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Summary Compensation Table

		Annual Compensation			Long-Term Compensation Awards
Name and Principal Position	Year Ended December 31,	Salary	Bonus	Other Annual Compensation	Number of Securities Underlying Options and Warrants
Mark Grannell Chief Executive Officer, Chief Operating Officer	2012	$150,000	--	--

	2011	$64,423	--	--	--

William P. Moore Chief Financial Officer and Secretary	2012	--

	2011	--

Compensation of Directors

The Directors do not currently receive compensation for their services as directors, but are reimbursed for expenses incurred in attending board meetings. In addition, there have been no options granted to any directors, other than in connection with the terms of the share exchange between Nicaragua and Ceelox Private.

Employment Agreement

On March 22, 2011, we entered into an agreement with 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 pro-rated 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 position of Acting Chief Financial Officer and Mark L. Grannell as Chief Executive Officer

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table presents information regarding the beneficial ownership of our common stock as of April 15, 2013, with respect to:

-	each of our executive officers listed in the summary compensation table;
-	each of our directors;

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-	all of our directors, director designees and executive officers as a group; and
-	each stockholder known by us to be the beneficial owner of 5% or more of our common stock.

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of our common stock subject to options or warrants that are currently exercisable or that will be issued and exercisable within 60 days of the closing of the Merger, are deemed to be outstanding and to be beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

The information presented in this table is based on 38,347,555 shares of common stock of Ceelox, Inc. issued and outstanding on May 9, 2012. Unless otherwise indicated, the address of each of the executive officers, directors and 5% or more stockholders named below is Ceelox, Inc., 10801 Mastin, Suite 920 Overland Park, Kansas 66210.

	Common Stock
Name of Beneficial Owner	Beneficially Owned	Percentage of Common Stock
Executive Officers and Directors:
William P. Moore III Revocable Trust & CIP, LLC(1)	26,696,365	69.6%

Mark L. Grannell(2)	805,308	N/A

All officers and directors as a group	27,501,673	71.7%
Other Stockholders with 5% or more of our common stock:
Endeavor Group, LLC(3)	2,650,000	6.9%
Philip E. Tearney	4,000,000	10.4%

(1)	All shares included herein are held through this individual’s ownership interest in CIP, LLC. Mr. Moore is the Sole Trustee of the William P. Moore, III Revocable Trust and controls the Trust’s shares.

(2)	Includes 805,308 shares of common stock issuable upon the exercise of currently vested options and warrants.

(3)	Located at 151 Rowayton Avenue, Suite 100, Rowayton, CT 06853

ITEM 13.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Director Independence

As of December 31, 2011, none of our directors qualify as “independent” in accordance with Rule 10A-3 of the Exchange Act.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

In 2009, the Company’s Board of Directors approved the engagement of Rothstein Kass as the Company’s new principal independent certified public accountants to audit the Company’s consolidated financial statements.

The following table sets forth the fees by our independent registered public accounting firms for each of the last two fiscal years:

Fee Category	Fiscal Year Ended December 31, 2012	Fiscal Year Ended December 31, 2011
Audit fees	$62,250	$46,396
Audit-related fees	-	-
Tax fees	-	-
All other fees	-	-

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Audit Fees. Consists of fees billed for professional services rendered for the audit of our financial statements and review of our interim consolidated financial statements included in quarterly reports and services that are normally provided in connection with statutory and regulatory filings or engagements.

Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit fees.” These services include employee benefit plan audits, accounting consultations in connection with acquisitions, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.

Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice, and tax planning. These services include assistance regarding federal, state and international tax compliance, tax audit defense, mergers and acquisitions, and international tax planning

All Other Fees. No other fees have been billed for products and services billed by our accountants.

Policy Related to Board of Directors Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Accounting Firm.

During the years ended December 31, 2012 and 2011, our board of directors pre-approval policies and procedures described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the board of directors pre-approve all accounting related activities prior to the performance of any services by any accountant or auditor.

The percentage of hours expended on the principal accountant’s engagement to audit our financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full time, permanent employees was 0%.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibit	Document Description
3.1	Articles of Incorporation.	Previously filed as Exhibit 3.1 to our Form SB-2 dated December 21, 2007

3.2	Bylaws.	Previously filed as Exhibit 3.2 to our Form SB-2 dated December 21, 2007

4.1	Specimen Stock Certificate.	Previously filed as Exhibit 4.1 to our Form SB-2 dated December 21, 2007

14.1	Code of Ethics.	Previously filed as Exhibit 14.1 to our Form 10-K dated January 30, 2009

31.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

99.1	Audit Committee Charter.	Previously filed as Exhibit 99.1 to our Form 10-K dated January 30, 2009

99.2	Disclosure Committee Charter.	Previously filed as Exhibit 99.2 to our Form 10-K dated January 30, 2009

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Signature	Title	Date

/s/ Mark Grannell Mark Grannell	Chief Executive Officer, and Director (Principal Executive)	April 15, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Mark L Grannell Mark Grannell	Chief Executive Officer, and Director (Principal Executive and Secretary)	April 15, 2013

/s/William P. Moore William P. Moore	Chairman of the Board and Acting Chief Financial Officer	April 15, 2013

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EXHIBIT INDEX

Exhibit	Document Description
3.1	Articles of Incorporation.	Previously filed as Exhibit 3.1 to our Form SB-2 dated December 21, 2007

3.2	Bylaws.	Previously filed as Exhibit 3.2 to our Form SB-2 dated December 21, 2007

4.1	Specimen Stock Certificate.	Previously filed as Exhibit 4.1 to our Form SB-2 dated December 21, 2007

14.1	Code of Ethics.	Previously filed as Exhibit 14.1 to our Form 10-K dated January 30, 2009

31.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

99.1	Audit Committee Charter.	Previously filed as Exhibit 99.1 to our Form 10-K dated January 30, 2009

99.2	Disclosure Committee Charter.	Previously filed as Exhibit 99.2 to our Form 10-K dated January 30, 2009

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Attached files

Ceelox Inc. Reports

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