Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X]
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QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013
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OR
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-1421766
CEELOX, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
10801 Mastin, Suite 920, Bldg # 8, Overland Park, Kansas 66210
(Address of principal executive offices, including zip code.)
(913) 884-3705
(telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [ ] NO [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer
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[ ]
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Accelerated Filer
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[ ]
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Non-accelerated Filer
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[ ]
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Smaller Reporting Company
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[X]
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
38,647,556 as of May 14, 2013.
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CEELOX, INC. AND SUBSIDIARY
June 30, 2013
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Page
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PART I.
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Item 1.
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Condensed Consolidated Financial Statements.
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Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012
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F-1
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Statements of Operations for the three and six months ended June 30, 2013 and 2012
(Unaudited)
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F-2
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Statements of Cash Flows for the three and six months ended June 30, 2013 and 2012
(Unaudited)
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F-3
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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F-4
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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16
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk.
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19
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Item 4.
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Controls and Procedures.
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19
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PART II.
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Item 1A.
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Risk Factors.
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20
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Item 6.
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Exhibits.
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20
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Signatures
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21
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-2-
CEELOX, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30,
2013
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December 31,
2012
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Unaudited
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|||||
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ASSETS
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|||||
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Current assets:
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Cash
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$
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5,125
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$
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4,718
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Prepaids and other current assets
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7,532
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11,336
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Total current assets
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$
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12,657
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$
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16,054
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LIABILITIES
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Current liabilities:
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Accounts payable and accrued liabilities
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$
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481,137
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$
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404,896
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Notes payable
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734,713
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445,525
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Notes payable, related party
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119,421
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119,093
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Convertible note – bridge loan
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194,522
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188,489
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Secured convertible note – in default
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187,500
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87,034
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Derivative liabilities
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6,139
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8,700
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Total current liabilities
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1,723,432
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1,253,737
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STOCKHOLDERS’ DEFICIT
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Preferred stock, $0.0001 par value; 5,000,000 undesignated shares,
authorized; none issued and outstanding
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Common stock, $0.00001 par value: Authorized 100,000,000 shares;
38,647,556 and 38,547,556 shares issued and outstanding as of June 30,
2013 and December 31, 2012, respectively
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387
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386
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Additional paid-in capital
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25,350,255
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25,349,256
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Accumulated deficit
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(26,671,991)
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(26,213,935)
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Total Ceelox, Inc.’s stockholders’ deficit
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(1,321,349)
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(864,293)
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Non controlling interests
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(389,426)
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(373,390)
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Total stockholders’ deficit
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(1,710,775)
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(1,237,683)
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Total liabilities and stockholders’ deficit
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$
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12,657
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$
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16,054
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See Notes to Condensed Consolidated Financial Statements
F-1
-3-
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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For the three months ended
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For the six months ended
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June 30,
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June 30,
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2013
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2012
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2013
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2012
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Operating costs and expenses:
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Marketing, general and administrative
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$
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133,683
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$
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166,219
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$
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328,025
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$
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292,360
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Total costs and expenses
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133,683
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166,219
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328,025
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292,360
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Operating loss
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(133,683)
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(166,219)
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(328,025)
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(292,360)
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Other income (expenses):
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Interest and amortization of financing fees
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(28,444)
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(20,145)
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(151,649)
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(35,061)
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Derivative income
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6,265
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283,528
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2,561
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165,750
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Other income
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3,021
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Total other income (expenses)
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(22,179)
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263,383
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(146,067)
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130,689
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Net loss
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(155,862)
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97,164
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(474,092)
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(161,671)
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Less: Net loss attributable to non-controlling interest
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5,016
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(3,675)
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16,036
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5,289
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Net loss attributable to common stockholders
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$
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(150,846)
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$
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93,489
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$
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(458,056)
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$
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(156,382)
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Basic and diluted loss per share
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$
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(0.00)
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$
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0.01
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$
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(0.01)
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$
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(0.00)
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Weighted average shares basic and diluted
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38,647,556
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38,311,292
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38,857,820
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35,609,751
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See Notes to Condensed Consolidated Financial Statements
F-2
-4-
CEELOX, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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For the three months ended
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For the six months ended
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June 30,
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June 30,
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2013
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2012
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2013
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2012
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss:
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$
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(155,862)
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$
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97,164
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$
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(474,092)
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$
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(161,671)
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Adjustments to reconcile net loss to net cash used in
operating activities:
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Amortization of debt discount
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100,467
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Amortization of financing fees
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812
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812
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Derivative income
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(6,265)
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(283,528)
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(2,561)
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(165,750)
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Effect on cash of changes in operating assets and
liabilities:
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Prepaids and other current assets
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223
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28,426
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10,809
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28,426
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Accounts payable and accrued liabilities
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100,997
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13,005
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117,143
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68,286
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NET CASH USED IN OPERATING ACTIVITIES
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(60,907)
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(144,121)
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(248,234)
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(229,897)
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CASH FLOW FROM FINANCING ACTIVITIES:
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Payments on notes payable - related party
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(4,506)
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Proceeds from notes payable
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65,141
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125,000
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248,641
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125,000
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Proceeds from issuance of secured convertible note
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104,625
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NET CASH PROVIDED BY FINANCING ACTIVITIES
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65,141
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125,000
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248,641
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225,119
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NET INCREASE (DECREASE) IN CASH
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4,234
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(19,121)
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407
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(4,778)
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CASH:
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Beginning of period
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891
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21,283
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4,718
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6,940
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End of period
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$
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5,125
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$
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2,162
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$
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5,125
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$
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2,162
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Supplemental disclosure of non-cash investing and
financing activities:
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Shares issued in satisfaction of related party debt
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$
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$
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$
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$
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9,406,456
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Shares issued in satisfaction of accounts payable
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$
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$
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1,000
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$
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$
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5,000
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Discount on notes payable
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$
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$
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4,950
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$
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$
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4,950
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Deferred financing fees resulting from issuance of
secured convertible note
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$
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$
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$
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$
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70,456
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See Notes to Condensed Consolidated Financial Statements
F-3
-5-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of Business
Ceelox, Inc. (the “Company”) was incorporated on October 24, 2007 in Nevada. 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.
2. Going Concern and Management’s Plans
During the six months ended June 30, 2013, 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 condensed consolidated financial statements, at June 30, 2013 and December 31, 2012, the Company had $5,125 and $4,718 in cash, respectively, and $1,710,775 and $1,237,683 in negative working capital, respectively. For the six months ended June 30, 2013 and 2012, the Company had a net loss of $474,092 and $161,671, respectively, and utilized $248,234 and $229,897, respectively, in cash from operations. For the three months ended June 30, 2013, the Company had a net loss of $155,862 and for the three months ended June 30, 2012 the Company had net income of $97,164. 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 condensed consolidated financial statements to the amounts and classification of assets and liabilities which could result should the Company be unable to continue as a going concern.
3. Basis of Presentation and Selected Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these statements do not include all of the information required by generally accepted accounting principles for annual financial statements. In the opinion of management, all known adjustments (consisting of normal recurring accruals and reserves) necessary to present fairly the financial position, results of operations and cash flows as of and for the interim periods have been included. It is suggested that these condensed consolidated interim financial statements be read in conjunction with the consolidated financial statements and related notes in the Company’s Form 10-K for the year ended December 31, 2012.
The operating results for the six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Principles of Consolidation
The condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the SEC’s accounting rules under Regulation S-X. All material inter-company accounts and transactions have been eliminated in consolidation.
F-4
-6-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Basis of Presentation and Selected Significant Accounting Policies (continued)
Use of Estimates
The preparation of condensed consolidated interim financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from those estimates.
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under Financial Accounting Standards Board (FASB) guidance regarding disclosures about fair value of financial instruments, approximate the carrying amounts presented in the accompanying condensed consolidated balance sheets.
Computation of Earning (Loss) Per Share
A basic earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares outstanding during the period. A diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, warrants and shares issuable upon the conversion of convertible notes. The dilutive effect of the convertible notes is calculated under the if-converted method. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instruments were exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a loss is reported. Accordingly, we did not include 12,676,045 and 12,661,025 of potentially dilutive options, warrants and convertible debt instruments at June 30, 2013 and 2012 respectively.
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For the six months ended
June 30,
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2013
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2012
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Potentially dilutive options
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2,181,111
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2,181,111
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Potentially dilutive warrants
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7,129,783
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7,129,783
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Potentially dilutive convertible instruments
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3,365,151
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3,350,131
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12,676,045
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12,661,025
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Recently Issued Accounting Standards
Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s condensed consolidated financial statements.
F-5
-7-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Convertible Notes Payable – Bridge Loans
In August of 2009 Ceelox Private entered into 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:
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1.
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Two years from the date of issuance
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2.
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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
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3.
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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”).
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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, 2010, holders of notes with a face value totaling $345,000 converted the face value plus accrued interest of $8,476 into 436,391 post merger common shares. Unamortized discounts of $25,069 were charged to interest expense upon conversion.
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.
During the six months ended June 30, 2013 and 2012, the Company recorded amortization of discounts in the amount of $0 and $538 related to unconverted instruments, respectively. As of June 30, 2013 and December 31, 2012, the carrying amounts of convertible bridge notes were $194,522 and $188,489, respectively. As of June 30, 2013, the convertible notes payable – bridge loans are considered in default.
5. Notes Payable - Related Party
On September 30, 2011, Ceelox issued a promissory note to a related party in the amount of $78,086, of which $44,856 and $44,732 was outstanding as of June 30, 2013 and December 31, 2012, respectively. 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 six months ended June 30, 2013 and 2012 amounted to $123 and $124.
On December 31, 2011, Ceelox issued a promissory note to a related party in the amount of $73,947 of which $74,565 and $74,361 were outstanding as of June 30, 2013 and December 31, 2012, respectively. 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 six months ended June 30, 2013 and 2012 amounted to $205 and $206.
The aggregate carrying values of these notes including accrued interest as of June 30, 2013 and December 31, 2012 amounted to $119,421 and $119,093, respectively.
F-6
-8-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. 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. 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 June 30, 2013, this note is in default. However, the Company is making progress in negotiations with a third party to secure financing, targeting third quarter of 2013, in which part of the use of the proceeds will be used 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%).
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.
F-7
-9-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
6. Secured Convertible Note Financing (continued)
Accounting for the Secured Convertible Notes (continued)
The following tables reflect the allocation of the purchase on the financing dates:
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$187,500
|
|||
|
Secured Convertible Note
|
Face Value
|
||
|
Proceeds
|
$
|
104,625
|
|
|
Day one derivative expense
|
119,722
|
||
|
Embedded conversion feature
|
(251,852)
|
||
|
Warrant derivative liability
|
(55,370)
|
||
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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 six months ended June 30, 2013 and 2012, the Company recorded interest expense related to the amortization of debt discount in the amount of $100,466 and $8,703, respectively. The carrying value of the secured convertible note as of June 30, 2013 and December 31, 2012 was $187,500 and $87,034, respectively.
7. Derivative Financial Instruments
The components of warrant derivative liability as reflected in the condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012 are as follows:
|
June 30, 2013
|
December 31, 2012
|
|||||
|
Secured convertible note giving rise to derivative
financial instruments:
|
Indexed
Shares
|
Fair
Values
|
Indexed
Shares
|
Fair
Values
|
||
|
Embedded conversion feature
|
3,125,000
|
$
|
3,125,000
|
$
|
2,488
|
|
|
Warrant derivative liability
|
625,000
|
6,139
|
625,000
|
6,212
|
||
|
3,750,000
|
$
|
6,139
|
3,750,000
|
$
|
8,700
|
|
F-8
-10-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
7. 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 six months ended June 30, 2013 and 2012:
|
Secured convertible note financing giving rise to derivative
financial instruments and the income effects:
|
Six Months Ended
June 30, 2013
|
Six Months Ended
June 30, 2012
|
|||
|
Embedded conversion feature
|
$
|
2,488
|
$
|
236,227
|
|
|
Warrant derivative liability
|
73
|
49,245
|
|||
|
Day-one derivative loss
|
(119,722)
|
||||
|
Total derivative gain (loss)
|
$
|
2,561
|
$
|
165,750
|
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 three months ended June 30, 2013 and 2012:
|
Secured convertible note financing giving rise to derivative
financial instruments and the income effects:
|
Three Months Ended
June 30, 2013
|
Three Months Ended
June 30, 2012
|
|||
|
Embedded conversion feature
|
$
|
$
|
234,375
|
||
|
Warrant derivative liability
|
6,265
|
49,153
|
|||
|
Day-one derivative loss
|
|||||
|
Total derivative gain (loss)
|
$
|
6,265
|
$
|
283,528
|
8. 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 similar assets 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.
F-9
-11-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
8. Fair Value Considerations (continued)
The following table presents information about the Company’s liabilities measured at fair value as of June 30, 2013 and December 31, 2012:
|
Financial Measurements Using
|
||||||||
|
June 30, 2013
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||
|
LIABILITIES
|
||||||||
|
Warrant derivative liabilities
|
$
|
$
|
$
|
6,139
|
$
|
6,139
|
||
|
Embedded conversion feature
|
||||||||
|
$
|
$
|
$
|
6,139
|
$
|
6,139
|
|||
|
December 31, 2012
|
||||||||
|
LIABILITIES
|
||||||||
|
Warrant derivative liabilities
|
$
|
--
|
$
|
--
|
$
|
6,212
|
$
|
6,212
|
|
Embedded conversion feature
|
2,488
|
2,488
|
||||||
|
$
|
$
|
$
|
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 warrant liability were as follows as of June 30, 2013:
|
Warrants
|
||||
|
Exercise price
|
$
|
0.06
|
||
|
Volatility
|
287.88
|
%
|
||
|
Equivalent term (years)
|
3.64
|
|||
|
Risk-free interest rate
|
0.66
|
%
|
||
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
|
%
|
||||
F-10
-12-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
8. 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 value hierarchy:
|
Balance as of December 31, 2012
|
$
|
(8,700)
|
|
|
Total gains or losses (realized or unrealized):
|
|||
|
Included in earnings
|
2,561
|
||
|
Balance as of June 30, 2013
|
$
|
(6,139)
|
9. 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 was 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. As of June 30, 2013 the debt discount has been fully amortized. 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 May 13, 2013, the Company received additional tranches of funding related to the May 18, 2012 note agreement aggregating $557,099. As of June 30, 2013, the aggregate face value of these notes equaled $682,099. As of June 30, 2013, the aggregate carrying value of the notes equaled $734,713. The difference between the aggregate face value and carrying value relates to accrued interest.
For the six months ended June 30, 2013, the Company recorded $40,547 in interest expense related to this note.
F-11
-13-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
10. Equity Activity
Warrants
The Company had outstanding warrants at June 30, 2013 totaling 7,129,783. The warrants expire at various dates ranging from August 21, 2014 through May 18, 2017 and have an average exercise price of $1.42.
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. 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. 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.
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.
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 June 30, 2013, 3,957,778 shares of the 6,000,000 shares approved under the Company’s Plan remain available for grant.
F-12
-14-
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
11. Mergers and Acquisitions
As announced on Form 8-K filed with the SEC on October 31, 2012, on October 25, 2012, the Company entered intoan 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) 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”). On April 25, 2013, the Company and Send Global agreed to extend the closing date from April 25, 2013 to May 25, 2013. Since the passage of May 25th date, the companies are in discussion to extend the agreement once additional funding has been identified.
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”). On March 28, 2013, the Company and AllCom agreed to extend the termination date of the agreement to April 30, 2013. Since the passage of April 30th date, the companies are in discussion to extend the agreement once additional funding has been identified.
F-13
-15-
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
This section of this quarterly report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of our prospectus. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.
Overview
We were 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 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.
As reported in the Company’s Form 8-K filed with the SEC on October 31, 2012: On October 25, 2012, the Company entered into an asset purchase agreement with Send Global Corporation and its parent, iTeknik Holding Corporation. Send Global, incorporated in 2005, is a Voice over Internet Provider (VoIP) registered by the Federal Communications Commission as a 214 telecommunications carrier. Send Global is authorized to operate in all 48 contiguous states, Alaska, Hawaii, Guam and the District of Columbia.
Send Global has evolved as the next generation of on-demand calling, replacing pre-paid calling cards. The company’s International cellular product line has been used by millions of people across the United States.
Send Global provides international calling services to regional telephone companies, independent retailers who resell cellular phone service and consumers, primarily foreign born, who purchase prepaid international long distance services directly from websites. In addition, Send Global has pioneered several innovations including the elimination of pin numbers, creating on-line accounts with the ability to recharge and manage accounts via the Internet. The company also offers proprietary software that enables retailers and regional telecom companies to manage their business on-line and recharge through a text mobile application.
Send Global is a registered 214 licensed telecommunications carrier and originates calls to more than 190 countries. The division offers cutting edge VoIP carrier services that provide least cost, high quality international call routing. Send Global also provides Regional Telephone Companies with a proprietary suite of software that allows for complete management of rates, routes and other key telecom business issues such as fraud screening.
Send Global has an innovative, user friendly web interface, EZPosa.biz, that independent retail outlets use to resell the company’s domestic and international PIN’s, and it’s on-demand international phone calling service. More than 3,000 retail outlets throughout the United States are registered to sell Send Global products. Stores like Send Global because there is no inventory and all purchases are made through user friendly, web-based software on the EZPosa.biz web site.
-16-
Working with major carriers, Send Global has established high quality, low cost routes to more than 190 regions of the globe. The majority of Send Global consumers are primarily from the rapidly increasing foreign born population in the U.S.
As part of the fulfillment of the Ceelox business approach, Send Global, along with their existing operations, represents a major distribution channel. Their services can be expanded to offer virtual credit cards and mobile services which could take advantages of products previously developed by Ceelox.
As a continuation of our business plan, Ceelox announced on Form 8-K filed with the SEC on December 3, 2012, on November 27, 2012, that the Company entered into an asset purchase agreement with AllCom, a Nevada corporation. Incorporated in 1997, AllCom set out to design and fully develop a proprietary mix of hardware and software that integrates three powerful technologies into one seamless service: Telecommunications, Electronic Banking, and the Internet.
AllCom developed the Genie platform providing the Universal Office offering a host of telecom and Internet services, and the Genie Gateway, the faster, safer way to pay and get paid online, via mobile devices, in store, or by phone, and send payments, all without sharing your financial information.
The goal of the Company will be to combine the assets of all three companies and personnel to create a telecom and financial platform and distribution network. Utilizing AllCom’s Genie 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.
Results of Operations
Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012
Net Revenue
For the six months ended June 30, 2013 and 2012 the Company had no revenues. This results from the fact that the Company was focused on continued product development and securing funding to execute its business plan.
Total Operating Costs and Expenses
Our total costs and expenses which consist of payroll and related benefits, consulting expenses, and marketing, general and administrative expenses increased by $35,665 or 12% for the six months ended June 30, 2013 from the six months ended June 30, 2012. The increase in Operating Costs and Expenses was due to post-merger expenses in the amount of $125,000 that occurred during the six months ended June 30, 2013.
Loss from Operations
Our operating loss for the six months ended June 30, 2013 was $328,025 compared to a loss of $292,360 for the six months ended June 30, 2012. The increased loss from operations of $35,665 or 12% was due to post-merger expenses in the amount of $125,000 that occurred during the six months ended June 30, 2013.
Interest Expense
Interest expense and related financing fees for the six months ended June 30, 2013 was $151,649 compared to $35,061 for the six months ended June 30, 2012, an increase of $116,588 or 333%. 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 $0 for the six months ended June 30, 2013 compared to $3,141 for the same period in 2012. In February 2010, the Company issued convertible notes to a related party totaling $450,000 (see footnote 7 of the Company’s financial statements). 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 $6,033 for the six months
-17-
ended June 30, 2013. In 2012, the Company issued promissory notes to a related party in the aggregate amount of $626,824. Interest expense for the six months ended June 30, 2013 related to these related party promissory notes amounted to $328. In February 2012, the Company issued a convertible promissory note in the amount of $187,500. Interest expense for the six months ended June 30, 2013 related to the amortization of debt discount and deferred finance fees on this note totaled $104,119. Additionally, between May 2012 and May 2013, the company issued additional convertible promissory notes aggregating $682,099, which contributed to the remaining interest of $40,547.
Results of Operations
Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012
Net Revenue
For the three months ended June 30, 2013 and 2012 the Company had no revenues. This results from the fact that the Company was focused on continued product development and securing funding to execute its business plan.
Total Operating Costs and Expenses
Our total costs and expenses which consist of payroll and related benefits, consulting expenses, and marketing, general and administrative expenses decreased by $32,536 or 20% for the three months ended June 30, 2013 from the three months ended June 30, 2012. The decrease in Operating Costs and Expenses was due to reductions in costs such as legal expense and other operation costs that occurred during the three months ended June 30, 2013.
Loss from Operations
Our operating loss for the three months ended June 30, 2013 was $133,683 compared to a loss of $166,219 for the three months ended June 30, 2012. The decreased loss from operations of $32,536 or 20% was due to reductions in costs such as legal expense and other operation costs that occurred during the three months ended June 30, 2013.
Interest Expense
Interest expense and related financing fees for the three months ended June 30, 2013 was $28,444 compared to $20,145 for the three months ended June 30, 2012, a decrease of $8,299 or 41%. 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 $0 for the three months ended June 30, 2013 compared to $0 for the same period in 2012. In February 2010, the Company issued convertible notes to a related party totaling $450,000 (see footnote 7 of the Company’s financial statements). 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 $3,033 for the six months ended June 30, 2013. In 2012, the Company issued promissory notes to a related party in the aggregate amount of $626,824. Interest expense for the three months ended June 30, 2013 related to these related party promissory notes amounted to $165. In February 2012, the Company issued a convertible promissory note in the amount of $187,500. Interest expense for the three months ended June 30, 2013 related to the amortization of debt discount and deferred finance fees on this note totaled $0. Additionally, between May 2012 and May 2013, the company issued additional convertible promissory notes aggregating $682,099, which contributed to the remaining interest of $24,795.
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.
-18-
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.
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. 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. As of June 30, 2013 we do not believe that our disclosure controls and procedures were effective.
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.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
The following documents are included herein:
|
Exhibit No.
|
Document Description
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
-19-
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities on this 5th day of August, 2013.
|
CEELOX INC.
|
||
|
(the “Registrant”)
|
||
|
|
||
|
|
||
|
By:
|
MARK L. GRANNELL
|
|
|
Mark L. Grannell
|
||
|
Chief Executive Officer and Chief Operating Officer
|
||
|
|
||
|
|
||
|
By:
|
WILLIAM P. MOORE
|
|
|
William P. Moore
|
||
|
Secretary, Treasurer and Chief Financial Officer
|
||
-20-