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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission file number   000-53597

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.

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 November 17, 2014.

 

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CEELOX, INC. AND SUBSIDIARY

September 30, 2014

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CEELOX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Financial Statements

F-1

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CEELOX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

F-2

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CEELOX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

F-3

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

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.

Our business plan defines the focus of the company to work towards development or acquisition of an Internet based Cloud platform.  This platform will become the foundation to launch a variety of services which can range from VOIP products, to online gaming, to financial services.  The value of the approach is that the platform can be used to offer products directly to end users, i.e. B2C, B2B, or can be white labeled for 3rd party providers i.e. B2B2C.

During the nine months ended September 30, 2014, 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 September 30, 2014 and December 31, 2013, the Company had $15,901 and $2,201 in cash, respectively, and $2,226,177 and $1,933,111 in negative working capital, respectively.  For the nine months ended September 30, 2014 and 2013, the Company had a net loss of $293,066 and $561,906, respectively, and utilized $216,050 and $252,982, respectively, in cash from operations.  For the three months ended September 30, 2014 and 2013, the Company had a net loss of $95,168 and $87,814. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

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, 2013.

 

The operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.

F-4

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

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.

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.

Computation of Earnings (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 12,504,727 and 12,613,163 of potentially dilutive options, warrants and convertible debt instruments at September 30, 2014 and 2013 respectively.

Reclassifications

Certain reclassifications have been made to conform to the current year presentation.

F-5

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

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.

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:

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 issued under this agreement.

As of September 30, 2014 and December 31, 2013, the carrying amounts of convertible bridge notes, including accrued interest were $209,756 and $200,656, respectively. As of September 30, 2014, the convertible notes payable – bridge loans are considered in default.

On August 6, 2012 in a complaint filed in Johnson County Kansas, Ceelox was found in default in re-payment of the notes plus interest for three note holders in the total amount of $100,000.  The Company does not currently have sufficient funds to repay the notes.

On September 30, 2011, Ceelox received advances from a related party in the amount of $78,086. These advances are payable on demand and have an interest rate of 0.55%. These funds were advanced to the Company to pay fees related to various consulting agreements. The outstanding balance of these advances as of September 30, 2014 and December 31, 2013 amounted to $45,165 and $44,980, respectively. The outstanding balances included accrued interest of $744 and $559 as of September 30, 2014 and December 31, 2013, respectively. Interest expense for the nine months ended September 30, 2014 and 2013 amounted to $185 and $185, respectively.

F-6

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

On December 31, 2011, Ceelox received additional advances from a related party in the amount of $73,947. These advances are payable on demand and have an interest rate of 0.55%. These funds were advanced to the Company to pay fees related for various consulting agreements. The outstanding balance of these advances as of September 30, 2014 and December 31, 2013 amounted to $75,081 and $74,774, respectively. The outstanding balances included accrued interest of $1,134 and $826 as of September 30, 2014 and December 31, 2013, respectively. Interest expense for the nine months ended September 30, 2014 and 2013 amounted to $308 and $308, respectively.

On May 18, 2012, the Company sold a $125,000 convertible promissory note ("Note") to a related party.  In connection with the sale of the Note the Company also issued to the related party 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. An event of default shall occur in the event the Company fails to make the principal and interest payment to the related party on or prior to the maturity date.  The Warrant issued to the related party allows the related party 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 $4,950. 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 September 30, 2014 the debt discount has been fully amortized. The purchase price allocation is as follows:

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 August 13, 2014, the Company received advances aggregating $841,599 from the same related party that purchased the $125,000 Note. These advances are subject to an interest rate of 13% per annum and are payable on demand. As of September 30, 2014 and December 31, 2013, the outstanding balance of the related party note and subsequent advances equaled $1,147,963 and $835,528, respectively. The outstanding balances included accrued interest of $150,456 and $98,679 as of September 30, 2014 and December 31, 2013, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded $82,685 and $62,897, respectively in interest expense related to the related party note and subsequent advances.

The aggregate outstanding balance of all the notes payable and related party advances issued from September 30, 2011 through August 13, 2014 amounted to $1,268,211 and $955,282 as of September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014 and December 31, 2013, the related parties have not required repayment of these notes and advances. The related parties have agreed that the balances will either be paid back or converted into common stock upon completion of a financial raise that the Company is currently seeking.

F-7

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

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 was 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 September 30, 2014, the only conversion option available to the holder is $0.10 per share since a Qualified Offering did not occur on or prior to the twelve (12) month anniversary of the final Closing Date. As of September 30, 2014, this note is in default. However, the Company is in negotiations with a third party to secure financing and has targeted the quarter ended December 31, 2014 to repay the Note provided a financing is consummated.

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-8

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

Accounting for the Secured Convertible Notes (continued)

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

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 nine months ended September 30, 2014 and 2013, the Company recorded interest expense related to the amortization of debt discount in the amount of $0 and $100,467, respectively. The carrying value of the secured convertible note as of September 30, 2014 and December 31, 2013 was $187,500 and $187,500, respectively.

The components of warrant derivative liability as reflected in the consolidated balance sheets as of September 30, 2014 and December 31, 2013 are as follows:

F-9

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

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 nine months ended September 30, 2014 and 2013:

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 September 30, 2014 and 2013:

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:

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.

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents information about the Company's liabilities measured at fair value as of September 30, 2014 and December 31, 2013:

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 September 30, 2014:

Significant assumptions in valuing the warrant liability were as follows as of December 31, 2013:

F-11

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

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:

Warrants:

The Company had outstanding warrants at September 30, 2014 and December 31, 2013 totaling 6,939,659 and 7,063,116, respectively. The warrants expire at various dates ranging from October 14, 2014 through May 18, 2017 and have an average exercise price of $0.15.

F-12

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

Stock Option Plans

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

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

As of September 30, 2014, 3,957,778 shares of the 6,000,000 shares approved under the Company's Plan remain available for grant.

During the periods ended September 30, 2014 and December 31, 2013, there were no options issued under the plan.

The number of options outstanding for periods ended September 30, 2014 and December 31, 2013 was 2,181,111 and 2,181,111, respectively.

Officer Compensation

On October 3, 2013, the Board of Directors approved the issuance of 5,000,000 shares of restricted common stock to an officer. The stock was granted for past services and was valued at $0.01 per share. In the quarterly period ended December 31, 2013, the stock-compensation expense of $50,000 is recorded in the statement of operations under general and administrative expenses.

F-13

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CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

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 s 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 transaction has expired and no additional discussions ensued. For the year ended December 31, 2013 and 2012, financing fees incurred on this acquisition agreement amounted to $125,000 in each year. For the nine months ended September 30, 2014 and 2013, the financing fees were $0 and $133,975, respectively.

Both transactions have expired and no additional discussions ensued.  The Company has turned their attention to the business plan and product set defined in Footnote 1.

A formal agreement was reached on October 31, 2014 between iTeknik Holding Corporation and the Company to terminate the asset purchase agreement.

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 over $9 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.

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) 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 transaction has expired and no additional discussions ensued. For the year ended December 31, 2013 and 2012, financing fees incurred on this acquisition agreement amounted to $125,000 in each year. A formal termination agreement was reached on October 31, 2014.

Both transactions have expired and no additional discussions ensued.  The Company has turned their attention to the business plan and product set defined in the following paragraphs.

Our business plan defines the focus of the company to work towards development or acquisition of an Internet based Cloud platform.  This platform will become the foundation to launch a variety of services which can range from VOIP products, to online gaming, to financial services.  The value of the approach is that the platform can be used to offer products directly to end users, i.e. B2C, B2B, or can be white labeled for 3rd party providers i.e. B2B2C.

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In addition, the cloud foundation could also leverage the products developed by Ceelox aimed at protecting users from hackers that steal their login/authentication credentials that put them at risk of losing their identity, loss of money, false purchases, etc.  These types of applications and services are susceptible to the man-in-the-middle threats but are cured though the Ceelox' parallel key infrastructure approach.  This cloud approach along with any one of the enabled services could produce significant revenues.

The Company continues its efforts to obtain financing to achieve its business objectives. Even though the task has taken longer than anticipated, the Company remains focused on securing financing to provide needed operating funds.

Results of Operations

Nine Months Ended September 30, 2014 Compared with Nine Months Ended September 30, 2013

Net Revenue

For the nine months ended September 30, 2014 and 2013 the Company had no revenues respectively.   No sales occurred in either period as a result of the Company's focus 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 administrative expenses decreased by $178,677 or 46% for the nine months ended September 30, 2014 from the nine months ended September 30, 2013.  In connection with our acquisition strategy, we incurred expired acquisition costs $0 and $125,000 for the nine months ended September 30, 2014 and 2013, respectively.  Compensation expense is $121,468 and $ 122,192 for the nine months ended September 30, 2014 and 2013.   

Loss from Operations

Our operating loss for the nine months ended September 30, 2014 was $211,606 compared to a loss of $390,283 for the nine months ended September 30, 2013. In connection with our acquisition strategy, we incurred expired acquisition costs $0 and $125,000 for the nine months ended September 30, 2014 and 2013, respectively.

Interest Expense

Interest expense and related financing fees for the nine months ended September 30, 2014 was $92,318 compared to $177,232 for the nine months ended September 30, 2013, a decrease of $84,914 or 18%.  Interest expense on the notes payable and advances from related parties amounted to $83,178 and $63,390 for the nine months ended September 30, 2014 and 2013, respectively. Interest expense on the convertible bridge loans was $9,100 for the nine months ended September 30, 2014 compared to $9,100 for the nine months ended September 30, 2013.  Interest expense on the secured convertible note financing, which related the amortization of debt discount and deferred finance fees, totaled $0 for the nine months ended September 30, 2014 versus $104,119 for the nine months ended September 30, 2013. Additional interest expense of $40 and $623 was recorded during the nine month ended September 30, 2014 and 2013, respectively. This additional interest related to penalties and finance charges.

Liquidity and Capital Resources

As of September 30, 2014, we had a working capital deficit of $2,226,177 as compared to a working capital deficit of $1,933,111 as of December 31, 2013.  In the past we have relied on sales of our equity and debt instruments to raise funds for our working capital requirements including related party advances 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.

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Operating Activities

Cash used in operations of $216,050 during the nine months ended September 30, 2014 was primarily a result of our $293,066 net loss reconciled with our net non-cash expenses relating to derivative expense and accrued interest.  Cash used in operations of $252,982 during the nine months ended September 30, 2013 was primarily a result of our $561,906 net loss reconciled with our net non-cash expenses relating to derivative expense, accrued interest, and amortization expense

Investing Activities

There were no investing activities during the nine months ended September 30, 2014 and 2013, respectively.  

Financing Activities

During the nine months ended September 30, 2014, we generated proceeds of $229,750 from our financing activities which consisted of: proceeds from related party advances.

Seasonality Results

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

Results of Operations

Three Months Ended September 30, 2014 Compared with Three Months Ended September 30, 2013

Net Revenue

For the three months ended September 30, 2014 and 2013 the Company had no revenues respectively.   No sales occurred in either period as a result of the Company's focus 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 administrative expenses decreased by $1,248 or 2% for the three months ended September 30, 2014 from the three months ended September 30, 2013. Compensation expense is $40,369 and $ 40,369 for the three months ended September 30, 2014 and 2013.   

Loss from Operations

Our operating loss for the three months ended September 30, 2014 was $61,010 compared to a loss of $62,258 for the three months ended September 30, 2013.

Interest Expense

Interest expense and related financing fees for the three months ended September 30, 2014 was $34,181 compared to $25,583 for the three months ended September 30, 2013, an increase of $8,598 or 34%.  Interest expense on the notes payable and advances from related parties amounted to $31,074 and $22,516 for the three months ended September 30, 2014 and 2013, respectively. Interest expense on the convertible bridge loans was $3,067 for the three months ended September 30, 2014 compared to $3,067 for the three months ended September 30, 2013. Additional interest expense of $40 and $0 was recorded during the nine month ended September 30, 2014 and 2013, respectively. This additional interest related to penalties and finance charges.

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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.

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 September 30, 2014 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.

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PART II. OTHER INFORMATION

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:

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities on this 17^th day of November, 2014.

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