---

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: 43,547,556 as of May 18, 2014.

 

---

---

CEELOX, INC. AND SUBSIDIARY

March 31, 2015

-2-

---

CEELOX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Financial Statements

F-1

---

CEELOX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

F-2

---

CEELOX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

F-3

---

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.

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 three months ended March 31, 2015, 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 March 31, 2015 and December 31, 2014, the Company had $203 and $536 in cash, respectively, and $2,361,365 and $2,266,856 in negative working capital, respectively.  For the three months ended March 31, 2015 and 2014, the Company had a net loss of $94,509 and $82,754, respectively, and utilized $12,833 and $33,088, respectively, in cash from operations.  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.

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, 2014.

 

The operating results for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.

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

---

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 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 including 5,000,000 vested unissued shares 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 6,447,558 and 12,620,653 of potentially dilutive options, warrants and convertible debt instruments at March 31, 2015 and 2014 respectively.

Reclassifications

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

Recently Issued Accounting Standards

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

F-5

---

CEELOX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

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 March 31, 2015 and December 31, 2014, the carrying amounts of convertible bridge notes, including accrued interest were $215,823 and $212,823, respectively. As of March 31, 2015, 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 March 31, 2015 and December 31, 2014 amounted to $45,288 and $45,227, respectively. The outstanding balances included accrued interest of $867 and $806 as of March 31, 2015 and December 31, 2014, respectively. Interest expense for the three months ended March 31, 2015 and 2014 amounted to $62 and $61, respectively.

F-6

---

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 March 31, 2015 and December 31, 2014 amounted to $75,287 and $75,187, respectively. The outstanding balances included accrued interest of $1,340 and $1,238 as of March 31, 2015 and December 31, 2014, respectively. Interest expense for the three months ended March 31, 2015 and 2014 amounted to $102 and $102, 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 March 31, 2015 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 February 17, 2015, the Company received advances aggregating $869,099 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 March 31, 2015 and December 31, 2014, the outstanding balance of the related party note and subsequent advances equaled $1,239,058 and $ $1,194,871, respectively. The outstanding balances included accrued interest of $244,959 and $212,272 as of March 31, 2015 and December 31, 2014, respectively. For the three months ended March 31, 2015 and 2014, the Company recorded $31,687 and $24,272, 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 February 17, 2015amounted to $1,359,635 and $1,315,285 as of March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015 and December 31, 2014, 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

---

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 March 31, 2015, 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 March 31, 2015, this note is in default. However, the Company is in negotiations with a third party to secure financing and has targeted the quarter ended June 30, 2015 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

---

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.

As of March 31, 2015 and December 31, 2014, the debt discount had been fully amortized. The carrying value of the secured convertible note as of March 31, 2015 and December 31, 2014 was $187,500 and $187,500, respectively.

The components of warrant derivative liability as reflected in the consolidated balance sheets as of March 31, 2015 and December 31, 2014 are as follows:

F-9

---

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 for the three months ended March 31, 2015 and 2014:

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 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.

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-10

---

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 March 31, 2015 and December 31, 2014:

 

December 31, 2014
Liabilities
Warrant derivative liabilities		$				$				$	3,500			$	3,500
Embedded conversion feature
		$				$				$	3,500			$	3,500

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 March 31, 2015:

Significant assumptions in valuing the warrant liability were as follows as of December 31, 2014:

F-11

---

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 March 31, 2015 and December 31, 2014 totaling 875,000 and 6,359,739, respectively. The warrants expire at various dates ranging from February 15, 2017 through May 18, 2017 and have an average exercise price of $0.06.

F-12

---

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 March 31, 2015, 3,957,778 shares of the 6,000,000 shares approved under the Company's Plan remain available for grant.

During the periods ended March 31, 2015 and December 31, 2014, there were no options issued under the plan.

The number of options outstanding for periods ended March 31, 2015 and December 31, 2014 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 issued for past services and was valued at $0.01 per share. In the quarterly period ended December 31, 2013, $50,000 in stock-compensation expense. is recorded in income statement under marketing, general and administrative expenses. As of March 31, 2015 these shares were not issued.

F-13

---

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 company 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.  This history has led the Company to focus on Cloud services. 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.

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.

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.

A result of the continued focus on our business plan, Ceelox has been performing due diligence with several acquisition targets whose products and services align with the product set defined herein.  Ceelox is currently in the process of negotiating the final terms to acquire the assets of a cloud based company.  In addition, Ceelox is working to raise capital to sustain the company during the acquisition and final product development leading to market launch.  Our goal is to complete the raise of capital and asset acquisition during the second quarter of 2015.

Results of Operations

Three Months Ended March 31, 2015 Compared with Three Months Ended March 31, 2014

Net Revenue

For the three months ended March 31, 2015 and 2014 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.

-16-

---

Total Operating Costs and Expenses

Our total costs and expenses consist of marketing, general and administrative expenses including payroll and related benefits, consulting expense that amounted to $55,524 and $47,319 for the three months ended March 31, 2015 and 2014, respectively. Marketing, general and administrative expenses increased by $8,205 or 17% during the three months ended March 31, 2015 compared to the same period in 2014.  The increase in expenses is primarily due to audit fees incurred in the amount of $7,500 that occurred during the three months ended March 31, 2015.  

Loss from Operations

Our operating loss for the three months ended March 31, 2015 was $55,524 compared to a loss of $47,319 for the three months ended March 31, 2014.  The increased loss from operations of $8,205 or 17% was due to an increase in costs such as audit fees incurred during the three months ended March 31, 2015. 

Interest Expense

Interest expense and related financing fees for the three months ended March 31, 2015 was $34,850 compared to $27,435 for the same period in 2014, an increase of $7,415 or 27%.The company has notes payable and advances from related parties of $1,359,135 and 1,315,285.at March 31, 2015 and 2014, respectivbely.  Interest expense related to these notes is $31,850 and $24,435 for the three months ended March 31,2015 and 2014, respectively.  The convertible note bridge loan is $215,823 and $212,823 at March 31, 2015 and 2014, respectively.  Interest expense on this note is $3,000 in the three months ended March 31, 2015 and 2014.

Liquidity and Capital Resources

As of March 31, 2015, we had a working capital deficit of $2,361,365 as compared to a working capital deficit of $2,266,856 as of December 31, 2014.  In the past we have relied on sales of our equity to raise funds for our working capital requirements, as well as loans from our majority stockholder, a related party.  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 funds will be available to us on acceptable terms.

Operating Activities

Cash used in operations of $12,833 during the three months ended March 31, 2015 was primarily a result of our $94,509 net loss reconciled with our net non-cash expenses relating to derivative expense, accrued interest, and amortization expense.  Cash used in operations of $33,088 during the three months ended March 31, 2014 was primarily a result of our $82,754 net loss reconciled with our net non-cash expenses relating to stock-based compensation expense, derivative expense, accrued interest, and amortization expense.  

Investing Activities

There were no investing activities during the three months ended March 31, 2015 and 2014, respectively.  

Financing Activities

During the three months ended March 31, 2015 and 2014, we generated proceeds of $12,500 and $31,000 from our financing activities which consisted of: proceeds from notes payable to related parties. We used less related party financing in the current year due to the reduction in our expenses.

-17-

---

Seasonality Results

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

Off-Balance Sheet Arrangements

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

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 March 31, 2015 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.

-18-

---

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:

-19-

---

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 18^th day of May, 2015.

-20-