ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
This section of this annual report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of our prospectus. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.
Overview
We were originally formed for the purpose of developing and marketing advanced fingerprint biometric technology and encryption software solutions. Our biometric identification and encryption software solutions provide innovative and new ways for customers to securely access, store, send and receive confidential information. We commenced marketing our products in the first half of 2007 following more than three years of technology and product development. We have invested over $12 million in the operations of the business including research and development, product development and marketing of our products.
As announced on Form 8-K filed with the SEC on January 27, 2012, Ceelox completed the fulfillment of the demand notice from CIP, LLC. In this agreement, Ceelox converted over $8 million in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. Since that time Ceelox has continued development of its business plan surrounding virtual credit card, social networking, and mobile, security. Ceelox will continue to seek merger and acquisition candidates with synergies within these areas. Ceelox is currently in discussions with CIP and will seek to license and/or purchase the intellectual property from CIP as appropriate to complete their new product rollout.
During the fourth quarter of 2012, the Company announced two purchase agreements.
·
|
As announced on Form 8-K filed with the SEC on October 31,2012, on October 25, 2012, the Company entered into an asset purchase agreement (“Agreement”) with Send Global Corporation, a Michigan corporation (“Send Global”), and iTeknik Holding Corporation, a Wyoming corporation and the Parent company of Send Global(“Parent,” and together with Send Global, the “Sellers,” and each a “Seller”).
|
·
|
As announced on Form 8-K filed with the SEC on December 3, 2012, on November 27, 2012, the Company entered into an asset purchase agreement (“Agreement” or “Asset Sale”) with AllCom, a Nevada corporation (“AllCom” or “Seller”).
|
Both transactions are expected to close during the second quarter of 2013.
Results of Operations
Net Revenue
For the years ended December 31, 2012 and 2011 the Company had revenues of $0 and $21,101, respectively. The decrease in sales is a result of the Company’s focus on continued product development and securing funding to execute its business plan and complete the acquisitions of iTeknik and AllCom.
Total Operating Costs and Expenses
Our total costs and expenses which consist of payroll and related benefits, consulting expenses, marketing, general and administrative expenses, depreciation and amortization, and research and development expenses decreased by $854,448 or 58% for the year ended December 31, 2012 from the year ended December 31, 2011. The decrease in Operating Costs and Expenses was due to a decrease of $700,109 or 53% in marketing, general and administrative expenses.
Loss from Operations
Our operating loss for the year ended December 31, 2012 was $620,071 compared to a loss of $1,453,418 for the year ended December 31, 2011. The decreased loss from operations of $833,347 or 57% was due largely to focus on product development and pursuit of funding to execute our business plan.
Interest Expense
Interest expense and related financing fees for the year ended December 31, 2012 was $153,288 compared to $268,823 for the year ended December 31, 2011, a decrease of $115,535 or 43%. In August 2005, Ceelox of Florida, a majority owned subsidiary of the Company, entered into a convertible note from a related party totaling $300,705 (see footnote 5 of the Company’s financial statements). Interest on that note was $3,141 for the year ended December 31, 2012 compared to $45,739 for the same period in 2011. In February 2010, the Company issued convertible notes to a related party totaling $450,000 (see footnote 7 of the Company’s financial statements) which contributed $1,980 additional interest expense. Between December 2009 and February 2010, the Company issued convertible bridge loan notes totaling $626,735, of which $350,000 was converted in February 2010. Interest expense on these notes was $12,919 for the year ended December 31, 2011. Of the $12,919 in interest expense, $12,381 is related to accrued interest and $538 is related to debt discount. In 2011, the Company issued promissory notes to a related party in the aggregate amount of $626,824. Interest expense for the year ended December 31, 2012 related to these related party promissory notes amounted to $725. In February 2012, the Company issued a convertible promissory note in the amount of $187,500. Interest expense for the year ended December 31, 2012 related to the amortization of debt discount and deferred finance fees on this note totaled $116,256. Additionally, in May 2012, the company issued a convertible promissory note in the amount of $125,000, which contributed to the remaining interest of $17,017.
Net Loss
During the year ended December 31, 2012 and 2011 the Company incurred net losses of $594,249 and $1,722,241 respectively. The decreased losses of $1,127,992 were primarily due to a reduction in workforce expenses while seeking additional funding for its business plan.
Liquidity and Capital Resources
As of December 31, 2012, we had a working capital deficit of $1,237,683 as compared to a working capital deficit of $10,115,840 as of December 31, 2011. In the past we have relied on sales of our equity to raise funds for our working capital requirements, as well as loans from our majority stockholder. We will need to raise additional capital in order to implement our business plan and will seek to sell additional equity and/or debt to accomplish this objective. There can be no assurance that we will be able to raise funds sufficient to carry out our business plan, or that if funds are available to us that they will be on acceptable terms.
Operating Activities
Cash used in operations of $464,238 during the year ended December 31, 2012 was primarily a result of our $594,249 net loss reconciled with our net non-cash expenses relating to stock-based compensation expense, accrued interest, and depreciation and amortization expense. Cash used in operations of $961,165 during the year ended December 31, 2011 was primarily a result of our $1,722,241 net loss reconciled with our net non-cash expenses relating to stock-based compensation expense, accrued interest, and depreciation and amortization expense
Investing Activities
During the year ended December 31, 2012 and December 31, 2011 we expended $0 and $0, respectively.
Financing Activities
During the year ended December 31, 2012, we generated proceeds of $462,015 from our financing activities which consisted of: (i) proceeds from notes payable of $361,897, (ii) proceeds from the secured convertible note in the amount of $104,625, and (iii) payments on a notes payable related party in the amount of $4,506.
Seasonality Results
We do not expect to experience any seasonality in our operating results.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements or financing activities with special purpose entities.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the SEC’s accounting rules under Regulation S-X. All material inter-company accounts and transactions have been eliminated in consolidation.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. On an ongoing basis, management evaluates its estimates and judgment, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation. Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements are set forth in Note 3 to our audited financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under Financial Accounting Standards Board (FASB) guidance regarding disclosures about fair value of financial instruments, approximate the carrying amounts presented in the accompanying consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful Accounts
The Company carries its accounts receivable at cost less an allowance for doubtful accounts. The allowance for doubtful accounts is determined using a combination of factors to ensure that trade and unbilled receivables balances are not overstated due to uncollectibility. The Company performs ongoing customer credit evaluation within the context of the industry in which it operates, does not require collateral, and maintains allowances for potential credit losses on customer accounts when deemed necessary. A specific allowance for a doubtful account up to 100% of the invoice will be provided for any problematic customer balances. Delinquent account balances are written-off after management has determined that the likelihood of collection is not possible.
Inventory
Inventories consist of computer equipment merchandise that is in its finished form and ready for sale to end-user customers. Inventories are recorded at the lower of average cost or market. In-bound freight-related costs from our vendors are included as part of the net cost of merchandise inventories. Other costs associated with acquiring, storing and transporting merchandise inventories are expensed as incurred. Our inventories are acquired and carried for retail sale and, accordingly, the carrying value is susceptible to, among other things, market trends and conditions and overall customer demand. We use our best estimates of all available information to establish reasonable inventory quantities. However, these conditions may cause our inventories to become obsolete and/or excessive. We review our inventories periodically for indications that reserves are necessary to reduce the carrying values to the lower of cost or market values. For the year ended December 31, 2012, the Company determined that no reserve was necessary.
Property and Equipment
Computer equipment, computer software and furniture and fixtures are stated at cost and depreciated on a straight-line basis over an estimated useful life of five years. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the related gain or loss is included in results from operations.
Software Development Costs, Patents and Trademarks
The Company capitalizes certain direct software development costs based upon stages of development. Capitalization of software development costs begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalization ceases upon the products market introduction. Amortization of software development cost is computed on an individual product basis on the straight-line method over the estimated economic life ranging from three to five years, and begins when a product is available for general release to customers.
Patents and trademarks costs consist of internal and external costs relating to the filing patents and costs of licensing trademarks. Patent and trademark costs are recorded at cost and amortized on a straight-line basis over ten years, the expected period of future utility and economic benefit.
Impairment of Long-Lived Assets and Other Intangible Assets
The Company evaluates the recoverability of long-lived assets with finite lives in accordance with ASC 350. Intangible assets, including purchased technology and other intangible assets, are carried at cost less accumulated amortization. Finite-lived intangible assets are being amortized on a straight-line basis over their estimated useful lives of five to ten years. ASC 350 requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value amount of an asset may not be recoverable. An impairment charge is recognized in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. A significant impairment of finite-lived intangible assets could have a material adverse effect on the Company’s financial position and results of operations. As further discussed in Note 5, for the year ended December 31, 2011 management recorded a loss on assets of $84,566.
The Company also assesses the impairment of long-lived assets in accordance with ASC 360, Property, Plant and Equipment, when circumstances indicate that the carrying value may not be recoverable. The Company determines if impairment has occurred through adverse changes. When it is determined that the estimated future cash flows of an asset will not be sufficient to recover its carrying amount, an impairment loss must be recorded to reduce the carrying amount to its estimated fair value. As discussed further in Note 4 of the accompanying consolidated financial statements, for the year ended December 31, 2011, management recorded a loss on assets of $8,677.
Revenue Recognition
Overview
We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is reasonably assured. If any of these criteria are not met, we defer recognizing the revenue until such time as all criteria are met. Determination of whether or not these criteria have been met may require us to make judgments, assumptions and estimates based upon current information and historical experience.
The Company markets its software products direct to commercial customers, to Value Added Resellers and Systems Integrators and to Original Equipment Manufacturers (“OEM”). Revenue may have four components: 1) license software revenue which provides a right to use Ceelox software products on a per seat/client or per server basis for an unlimited period; 2) software maintenance, 3) hardware, such as fingerprint readers and flash memory devices, and 4) professional services, primarily installation support. The Company also performs custom software development on a limited basis when necessary to support significant account or revenue opportunities.
The Company has developed suggested retail pricing for all revenue components which include volume related discounting where appropriate. In addition the Company may negotiate prices on an individual case basis for significant volume or significant account opportunities.
Hardware and Software Revenue
The Company recognizes hardware revenue upon invoicing. Invoicing is triggered upon shipping. In products that have a hardware and software component that is not broken out in the Company’s pricing, that includes hardware in the form of flash memory, the Company considers the value of the hardware to be de minimis and records the sale under the Software/Hardware classification.
Software License Revenue
License software revenue is recognized at the time of invoicing. Invoicing is timed with shipment or delivery of licensed software. The Company warrants that its software is free from material defects and will replace any defective products with a functional replacement.
Maintenance includes customer access to and right to software bug fixes and new releases of the company’s software. These releases are made available to customers who download releases at their discretion. The Company’s licensed software includes first-year maintenance. Subsequent year maintenance is offered, at a percentage of the initial software license revenue, on an annual basis on the anniversary of the original purchase date. When deemed material, this revenue is amortized over the life of the license agreement on a straight-line basis.
Contract Revenue
Professional Services: Our customers occasionally request professional services support related to server installation support. The Company recognizes professional services revenue at the time the support is provided. Billing is on a rate per day basis.
Custom Software Development: Revenues from multi-element arrangements are allocated to the individual elements based upon relative fair values using vendor-specific objective evidence of fair value. Revenues received from customers where all revenue recognition criteria have not been established are deferred until such criteria have been achieved.
Research and Development
The Company expenses research and development costs as they are incurred.
Advertising and Marketing Costs
The company expenses advertising and marketing costs as they are incurred.
Stock-Based Compensation and Equity Incentive Plans
For the years ended December 31, 2012 and 2011, the Company maintained a stock plan covering equity grants including stock options and warrants.
The Company accounts for stock-based compensation in accordance with ASC 718. The standard requires the measurement and recognition of compensation expense in the Company’s statement of operations for all share-based payment awards made to the Company’s employees, directors and consultants including employee stock options, non-vested equity stock and equity stock units, and employee stock purchase grants. Stock-based compensation expense is measured at grant date, based on the estimated fair value of the award, reduced by an estimate of the annualized rate of expected forfeitures, and is recognized as expense over the employees’ expected requisite service period, generally using the straight-line method. In addition, ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under previous accounting rules. Ceelox Inc.’s forfeiture rate represents the historical rate at which Ceelox Inc.’s stock-based awards were surrendered prior to vesting. ASC 718 requires forfeitures to be estimated at the time of grant and revised on a cumulative basis, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Computation of (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, warrants and shares issuable upon the conversion of convertible notes. The dilutive effect of the convertible notes is calculated under the if-converted method. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instruments were
exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a loss is reported. Accordingly, we did not include 25,372,824 and 25,372,824 of potentially dilutive options, warrants and convertible debt instruments at December 31, 2012 and 2010, respectively.
|
For the Years Ended
|
|
2012
|
|
2011
|
Potentially dilutive options
|
2,181,111
|
|
2,181,111
|
Potentially dilutive warrants
|
7,129,783
|
|
6,254,783
|
Potentially dilutive convertible instruments
|
3,357,701
|
|
16,841,984
|
|
12,668,595
|
|
25,277,878
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CEELOX, INC. AND SUBSIDIARY
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Balance Sheets
|
F-2
|
|
Statements of Operations
|
F-3
|
|
Statements of Stockholders’ Deficit
|
F-4
|
|
Statements of Cash Flows
|
F-5
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-6
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ceelox, Inc.
We have audited the accompanying consolidated balance sheets of Ceelox, Inc. and Subsidiary (collectively the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the two-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ceelox, Inc. and Subsidiary as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the two-year period then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has negative working capital and a stockholders’ deficit, significant current and cumulative losses and negative operating cash flows. Furthermore, the Company’s cash and working capital positions as of December 31, 2012 are not sufficient to complete its planned activities for the upcoming year. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/
Rothstein Kass
Dallas, Texas
April 15, 2013
F-1
CEELOX, INC. AND SUBSIDIARY
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
4,718
|
|
|
$
|
6,940
|
|
Prepaids and other current assets
|
|
|
11,336
|
|
|
|
17,628
|
|
Total current assets
|
|
$
|
16,054
|
|
|
$
|
24,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
404,896
|
|
|
$
|
387,289
|
|
Advances, related party
|
|
|
|
|
|
|
7,833,128
|
|
Notes payable
|
|
|
445,525
|
|
|
|
|
|
Notes payable, related party
|
|
|
119,093
|
|
|
|
628,421
|
|
Convertible notes payable, related party
|
|
|
|
|
|
|
960,185
|
|
Convertible note – bridge loans ($0 and $155,634 due to stockholders
as of December 31, 2012 and 2011, respectively)
|
|
|
188,489
|
|
|
|
331,385
|
|
Secured convertible note
|
|
|
87,034
|
|
|
|
|
|
Derivative liabilities
|
|
|
8,700
|
|
|
|
|
|
Total current liabilities
|
|
|
1,253,737
|
|
|
|
10,140,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 5,000,000 undesignated shares, authorized, none issued
|
|
|
|
|
|
|
|
|
and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.00001 par value: Authorized
|
|
|
|
|
|
|
|
|
100,000,000 shares; issued: 38,547,556 and 14,147,556 shares issued and outstanding as of December 31, 2012
|
|
|
|
|
|
|
|
|
and 2011, respectively
|
|
|
386
|
|
|
|
142
|
|
Additional paid-in capital
|
|
|
25,349,256
|
|
|
|
15,877,094
|
|
Accumulated deficit
|
|
|
(26,213,935
|
)
|
|
|
(25,639,942
|
)
|
Non controlling interests
|
|
|
(373,390
|
)
|
|
|
(353,134
|
)
|
Total stockholders’ deficit
|
|
|
(1,237,683
|
)
|
|
|
(10,115,840
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
16,054
|
|
|
$
|
24,568
|
|
See Notes to Consolidated Financial Statements
F-2
CEELOX, INC. AND SUBSIDIARY
|
|
For the Years Ended
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Hardware and software
|
|
$
|
|
|
$
|
1,374
|
|
Licensing
|
|
|
|
|
|
19,727
|
|
Total Revenue
|
|
|
|
|
|
21,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Costs of hardware sales
|
|
|
|
|
|
5,130
|
|
Marketing, general and administrative
|
|
|
620,071
|
|
|
|
1,320,180
|
|
Depreciation and amortization
|
|
|
|
|
|
|
19,474
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
129,735
|
|
Total costs and expenses
|
|
|
620,071
|
|
|
|
1,474,519
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(620,071
|
)
|
|
|
(1,453,418
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest and amortization of financing fees
|
|
|
(152,978
|
)
|
|
|
(268,823
|
)
|
Derivative income
|
|
|
178,800
|
|
|
|
|
|
Total other expenses
|
|
|
25,822
|
|
|
|
(268,823
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(594,249
|
)
|
|
$
|
(1,722,241
|
)
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to non-controlling interest
|
|
|
20,256
|
|
|
|
57,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(573,993
|
)
|
|
$
|
(1,664,255
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic and diluted
|
|
|
36,923,029
|
|
|
|
11,885,723
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
Payroll and related benefits
|
|
$
|
7,000
|
|
|
$
|
13,483
|
|
Consulting
|
|
$
|
|
|
|
$
|
127,125
|
|
Legal Fees
|
|
$
|
|
|
|
$
|
80,000
|
|
See Notes to Consolidated Financial Statements
F-3
CEELOX, INC. AND SUBSIDIARY
|
Number of
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Non-Controlling
Interest
|
|
|
Total
|
|
BALANCE at January 1, 2011
|
|
11,383,673
|
|
|
$
|
114
|
|
|
$
|
15,594,014
|
|
|
$
|
(23,975,687
|
)
|
|
$
|
(295,148
|
)
|
|
$
|
(8,676,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
13,483
|
|
|
|
|
|
|
|
|
|
|
|
13,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services
|
|
2,763,883
|
|
|
|
28
|
|
|
|
269,597
|
|
|
|
|
|
|
|
|
|
|
|
269,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,664,255
|
)
|
|
|
(57,986
|
)
|
|
|
(1,722,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE at December 31, 2011
|
|
14,147,556
|
|
|
$
|
142
|
|
|
$
|
15,877,094
|
|
|
$
|
(25,639,942
|
)
|
|
$
|
(353,134
|
)
|
|
$
|
(10,115,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services
|
|
400,000
|
|
|
|
4
|
|
|
|
6,996
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of related party debt into common
stock
|
|
24,000,000
|
|
|
|
240
|
|
|
|
9,460,216
|
|
|
|
|
|
|
|
|
|
|
|
9,460,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with notes payable
financing
|
|
|
|
|
|
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(573,993
|
)
|
|
|
(20,256
|
)
|
|
|
(594,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE at December 31, 2012
|
|
38,347,556
|
|
|
$
|
386
|
|
|
$
|
25,349,256
|
|
|
$
|
(26,213,935
|
)
|
|
$
|
(373,390
|
)
|
|
$
|
(1,237,683
|
)
|
See Notes to Consolidated Financial Statements
F-4
CEELOX, INC. AND SUBSIDIARY
|
|
For the Years Ended
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss:
|
|
$
|
(594,249
|
)
|
|
$
|
(1,722,241
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock compensation expense to consultants and employees
|
|
|
7,000
|
|
|
|
220,608
|
|
Depreciation and amortization
|
|
|
|
|
|
|
19,474
|
|
Amortization of financing fees
|
|
|
812
|
|
|
|
|
|
Amortization of debt discount
|
|
|
91,983
|
|
|
|
|
|
Derivative income
|
|
|
(178,800
|
)
|
|
|
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
129,735
|
|
Effect on cash of changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
7,206
|
|
Inventory
|
|
|
|
|
|
|
(817
|
)
|
Prepaids and other current assets
|
|
|
75,170
|
|
|
|
25,870
|
|
Accounts payable and accrued liabilities
|
|
|
133,849
|
|
|
|
359,000
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(464,235
|
)
|
|
|
(961,165
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments on notes payable - related party
|
|
|
(4,506
|
)
|
|
|
|
|
Advances from related party
|
|
|
|
|
|
|
385,552
|
|
Proceeds from notes payable
|
|
|
361,897
|
|
|
|
|
|
Proceeds from notes payable, related party
|
|
|
|
|
|
|
556,824
|
|
Proceeds from issuance of convertible note – bridge loans
|
|
|
104,625
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
462,015
|
|
|
|
942,376
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
(2,220
|
)
|
|
|
(18,789
|
)
|
CASH:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
6,940
|
|
|
|
25,729
|
|
End of period
|
|
$
|
4,718
|
|
|
$
|
6,940
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance – Expenses paid by related party
|
|
|
|
|
|
$
|
70,000
|
|
Shares issued in satisfaction of related party debt
|
|
$
|
9,464,596
|
|
|
$
|
|
|
Discount on notes payable
|
|
$
|
4,138
|
|
|
$
|
|
|
Deferred financing fees resulting from issuance of secured convertible note
|
|
$
|
70,456
|
|
|
$
|
|
|
See Notes to Consolidated Financial Statements
F-5
CEELOX, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
1. Nature of Business and Recapitalization Transaction
Ceelox, Inc. (the “Company”) (formerly Nicaragua Rising, Inc. or “Nicaragua”) was incorporated on October 24, 2007 in Nevada. The Company was a development stage company until the occurrence of the following recapitalization transaction. On February 12, 2010, (the “Merger Date”), pursuant to the share exchange agreement between Ceelox Private (defined below), certain shareholders of Ceelox Private, the Company and the Company’s majority shareholder, the Company exchanged 1 share of the Company’s common stock for every 9 shares of Ceelox Private common stock (the “Merger”). As a result of the Merger, Ceelox Private became a majority-owned subsidiary of the Company. See Note 13 for a more detailed discussion of the Nicaragua-Ceelox Private Share Exchange.
The Company’s majority-owned subsidiary Ceelox, Inc. (“Ceelox Private”) was incorporated in the State of Florida and commenced operations on September 17, 2003. Through the Company’s majority-owned subsidiary, the Company offers software solutions and devices that deliver biometric identity-based user access authentication, verification, and data and email encryption. The Company’s biometric authentication provides protection against identity theft, and our solutions also meet regulatory requirements for two-factor authentication.
Prior to the above transaction, on November 5, 2009, the majority beneficial owner of Ceelox Private acquired 11,091,000 shares of the Company’s common stock, representing 98.5% of the issued and outstanding common stock. The net assets of Ceelox Private and the Company were combined at their respective net asset value on February 12, 2010 and no goodwill was recorded as a result of the Merger.
The Company formally changed its name from Nicaragua Rising, Inc. to Ceelox, Inc., a Nevada Corporation, on September 30, 2010.
2. Going Concern and Management’s Plans
During the years ended December 31, 2012 and 2011, the Company was engaged in continued development of our business plan surrounding virtual credit card, social networking and mobile, security and continues to seek merger and acquisition candidates with synergies within these areas. As indicated in the accompanying consolidated financial statements, at December 31, 2012 and 2011, the Company had $4,718 and $6,940 in cash, respectively, and $1,237,683 and $10,115,840 in negative working capital, respectively. For the years ended December 31, 2012 and 2011, the Company had a net loss of $594,249 and $1,722,241, respectively, and utilized $464,238 and $961,165, respectively, in cash from operations. These factors, among others, indicate that the Company is in need of additional financing in order to continue its planned activities for the year that began on January 1, 2013. No adjustment has been made in the accompanying consolidated financial statements to the amounts and classification of assets and liabilities which could result should the Company be unable to continue as a going concern.
License and Intellectual Property
On August 3, 2011, CIP, the Company’s majority stockholder executed a majority stockholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on August 12, 2011 in exchange for CIP’s agreement to forgive all amounts due under the Note and all other amounts due to CIP by Ceelox Sub. This action would result in the termination of (i) that certain License Agreement dated July 20, 2007 between CIP and Ceelox Sub and (ii) that certain Exclusive Software Development Maintenance and Marketing Services Agreement dated July 20, 2007 between CIP and Ceelox Sub. In connection with the stockholder consent, Ceelox Sub has agreed to execute and return certain documents that accompanied the Demand Letter on or before August 12, 2011, including the following: (i)Termination, Settlement and Full Release, (ii) Omnibus Bill of Sale and Assignment and (iii) Global Assignment of Intellectual Property Rights, (collectively, the “Settlement Agreements”).
F-6
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
2. Going Concern and Management’s Plans (continued)
License and Intellectual Property (continued)
As announced on Form 8-K filed with the SEC on January 27, 2012, Ceelox completed the fulfillment of the demand notice from CIP, LLC. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. Since that time Ceelox has continued development of its business plan surrounding virtual credit card, social networking, and mobile, security. Ceelox will continue to seek merger and acquisition candidates with synergies within these areas. Ceelox is currently in discussions with CIP and will seek to license and/or purchase the intellectual property from CIP as appropriate to complete their new product rollout.
Leased Space
Until July 31, 2011, the Company’s offices were located at 13976 Lynmar Blvd., Tampa, FL 33626 where the Company leased approximately 7,000 square feet of office space. Pursuant to the lease, the monthly rent is $6,710, and as of December 31, 2011, the Company owes $44,937 in deferred payments. After July 31, 2011, the Company did not renew the lease agreement at 13976 Lynmar Blvd, Tampa, Florida 33626, and shared office space with a related party at 10801 Mastin, Suite 920, Bldg # 8, Overland Park, Kansas 66210.
Employee Furlough
During the July 2011 the Company furloughed all remaining employees with the exception of the Chief Executive Officer and the Chief Operating Officer. The Company may bring back certain employees if new funding is secured and/or the Company enters into a strategic transaction. Although the Company furloughed substantially all its employees, the Company continues to sell and develop its products and pursue funding and/or a strategic transaction with a third party.
3. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with Regulation S-X of the Securities and Exchange Commission (“SEC”). All material inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
F-7
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
3. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
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.
Revenue Recognition
Overview
We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is reasonably assured. If any of these criteria are not met, we defer recognizing the revenue until such time as all criteria are met. Determination of whether or not these criteria have been met may require us to make judgments, assumptions and estimates based upon current information and historical experience.
The Company markets its software products direct to commercial customers, to Value Added Resellers and Systems Integrators and to Original Equipment Manufacturers (“OEM”). Revenue may have four components: 1) license software revenue which provides a right to use the Company software products on a per seat/client or per server basis for an unlimited period; 2) software maintenance 3) hardware, such as fingerprint readers and flash memory devices and 4) professional services, primarily installation support. The Company also performs custom software development on a limited basis when necessary to support significant account or revenue opportunities.
The Company has developed suggested retail pricing for all revenue components which include volume related discounting where appropriate. In addition the Company may negotiate prices on an individual case basis for significant volume or significant account opportunities.
Hardware and Software Revenue
The Company recognizes hardware revenue upon invoicing. Invoicing is triggered upon shipping. In products that have a hardware and software component that is not broken out in the Company’s pricing, such as with Ceelox Portable Vault that includes hardware in the form of flash memory, the Company considers the value of the hardware to be de minimis and records the sale under the Software/Hardware classification.
Software License Revenue
License software revenue is recognized at the time of invoicing. Invoicing is timed with shipment or delivery of licensed software. The Company warrants that its software is free from material defects and will replace any defective products with a functional replacement.
Maintenance includes customer access to and right to software bug fixes and new releases of the company’s software. These releases are made available to customers who download releases at their discretion. The Company’s licensed software includes first-year maintenance. Subsequent year maintenance is offered, at a percentage of the initial software license revenue, on an annual basis on the anniversary of the original purchase date. When deemed material, this revenue is amortized over the life of the license agreement on a straight-line basis.
F-8
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
3. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Research and Development
The Company expenses research and development costs as they are incurred.
Advertising and Marketing Costs
The Company expenses advertising and marketing costs as they are incurred. Such costs for the years ended December 31, 2012 and 2011 amounted to approximately $0 and $46,000, respectively.
Stock-Based Compensation and Equity Incentive Plans
For the years ended December 31, 2012 and 2011, the Company maintained a stock plan covering equity grants including stock options and warrants. (See Note 16, “Equity Incentive and Stock-Based Compensation Plan,” for a detailed description of the Company’s plans.)
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. The standard requires the measurement and recognition of compensation expense in the Company’s consolidated statement of operations for all share-based payment awards made to the Company’s employees, directors and consultants including employee stock options, non-vested equity stock and equity stock units, and employee stock purchase grants. Stock-based compensation expense is measured at grant date, based on the estimated fair value of the award, reduced by an estimate of the annualized rate of expected forfeitures, and is recognized as expense over the employees’ expected requisite service period, generally using the straight-line method. In addition, ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under previous accounting rules.
The Company’s forfeiture rate represents the historical rate at which the Company’s stock-based awards were surrendered prior to vesting. ASC 718 requires forfeitures to be estimated at the time of grant and revised on a cumulative basis, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Computation of (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, warrants and shares issuable upon the conversion of convertible notes. The dilutive effect of the convertible notes is calculated under the if-converted method. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instruments were exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a loss is reported. Accordingly, we did not include 12,668,595 and 25,277,878 of potentially dilutive options, warrants and convertible debt instruments at December 31, 2012 and 2011, as shown below:
F-9
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
3. Basis of Presentation and Summary of Significant Accounting Policies (continued)
Computation of (Loss) Per Share (continued):
|
For the Years Ended
|
|
2012
|
|
2011
|
Potentially dilutive options
|
2,181,111
|
|
2,181,111
|
Potentially dilutive warrants
|
7,129,783
|
|
6,254,783
|
Potentially dilutive convertible instruments
|
3,357,701
|
|
16,841,984
|
|
12,668,595
|
|
25,277,878
|
Non-controlling Interest Ceelox Private
Certain shareholders of Ceelox Private did not participate in the Merger and share exchange between Nicaragua and Ceelox Private (see Note 13). At December 31, 2012 and 2011, these shareholders are recorded as non controlling interests in the consolidated financial statements. Details of changes in the non controlling interests are reflected in the consolidated statements of stockholders’ deficit.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Issued Accounting Standards
Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s consolidated financial statements.
4. Property and Equipment
Depreciation expense for the years ended December 31, 2012 and 2011 amounted to $0 and $3,227, respectively.
The office equipment and furniture was abandoned on July 31, 2011 when the Company did not renew the lease agreement at 13976 Lynmar Blvd, Tampa, Florida 33626, and moved its offices to 10801 Mastin, Suite 920, Bldg # 8, Overland Park, Kansas 66210. As a result of the abandonment, the Company recorded a loss on disposal of office equipment and furniture in the amount of $8,677 during the year ended December 31, 2011.
5. Software Development Costs, Patents, and Trademarks
Amortization expense for the years ended December 31, 2012 and 2011 amounted to $0 and $16,247, respectively.
During the year ended December 31, 2011, the Company recorded a loss on disposal of software development costs, patents and trademarks in the amount of $84,566 to equal the full amount of the carrying value. The impairment charge resulted from the fact that on January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the assets of Ceelox that secured the note (the “Collateral”) to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,368 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock. Consequently, at December 31, 2011, management did not believe there was a future economic benefit to these assets based on CIP’s intentions.
F-10
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
6. Advances from Related Party
On July 20, 2007 the Company granted a related party an exclusive, fully paid-up, royalty-free, irrevocable, perpetual, worldwide, transferable, assignable, license, with the right to sublicense in and to all the Companies intellectual property (the “License Agreement”). Subject to the License Agreement the Company maintains all of its right, title and interest in and to the intellectual property. The License Agreement was effective immediately and continues indefinitely, unless and until terminated by mutual agreement. Additionally and in connection with this agreement, the Company entered into a Software Services Agreement with the related party whereby they agreed to pay the Company costs associated with marketing its products and maintaining and developing our products based on our biweekly cash burn rate, net of sales collections.
During the years ended December 31, 2012 and 2011, the Company received advances of $0 and $385,552, respectively, under this agreement. Interest accrued for the years ended December 31, 2012 and 2011 amounted to $0 and $96,388, respectively.
Total advances including the reacquisition fee, which is being treated as interest expense, amounted to $0 and $7,833,128 as of December 31, 2012 and 2011, respectively.
On January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,927 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. As a result, all of the advances from related party were converted.
7. Convertible Notes Payable - Related Party
On June 14, 2007, the Company entered into a convertible note agreement in the amount of $300,705. Under this agreement, the instrument was convertible into common stock at a conversion rate of $1.35. Interest expense for the years ended December 31, 2012 and 2011 amounted to $3,141 and $45,739, respectively.
On February 10, 2010, the Company entered into a convertible note with a related party in the amount of $350,000 in exchange for 9,916,000 of common stock held by the related party. Simultaneously, the related party cancelled an additional 1,175,101 shares for no consideration. The note has a term of one year and accrues interest at 8% per annum. Under this agreement, the note was convertible into common stock at $0.81 per share. Interest expense for the years ended December 31, 2012 and 2011 amounted to $1,540 and $22,420, respectively. On February 12, 2011 the term of the note was modified from February 10, 2011 to ‘on demand by the holder’.
F-11
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
7. Convertible Notes Payable - Related Party (continued)
On February 10, 2010, the Company converted a related party advance into a convertible note in the amount of $100,000. The note has a term of one year and accrues interest at 8% per annum. Under this agreement, the note was convertible into common stock at $0.81 per share. Interest expense for the years ended December 31, 2012 and 2011 amounted to $440 and $6,406, respectively. On February 12, 2011 the term of the note was modified from February 10, 2011 to ‘on demand by the holder’.
On January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,927 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock to CIP. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. As a result, all of the convertible notes payable – related party was converted into common stock.
At December 31, 2012 and 2011, the carrying value of convertible notes payable due to related parties consisted of the following:
|
|
Principal
|
|
|
Accrued
Interest
|
|
|
Balance
|
|
Balance January 1, 2011
|
|
$
|
750,705
|
|
|
$
|
134,915
|
|
|
$
|
885,620
|
|
Interest accrued December 31, 2011
|
|
|
-
|
|
|
|
74,565
|
|
|
|
74,565
|
|
Balance December 31, 2011
|
|
|
750,705
|
|
|
|
209,480
|
|
|
|
960,185
|
|
Interest accrued January 24, 2012
|
|
|
-
|
|
|
|
5,121
|
|
|
|
5,121
|
|
Notes converted at January 24, 2012
|
|
|
(750,705
|
)
|
|
|
(214,601
|
)
|
|
|
(965,306
|
)
|
Balance December 31, 2012
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
8. Convertible Notes Payable – Bridge Loans
In August of 2009 the Ceelox Private entered in to a convertible note subscription agreement with certain accredited investors. The offering was for $1.5 million in convertible notes and common stock purchase warrants.
The notes are due and payable upon the earlier of:
|
1.
|
Two years from the date of issuance
|
|
|
|
|
2.
|
The date of completion, by Ceelox Private, of a transaction pursuant to which it becomes a majority-owned subsidiary of a publicly-traded company along with a simultaneous financing in the minimum amount of $1,500,000 (for purposes hereof this shall be referred to as a “Reverse Merger”), or
|
|
|
|
|
3.
|
The date on which Ceelox Private is acquired in a non-Reverse Merger transaction whereby a non-affiliated third-party acquires 50% or more of Ceelox Private’s capital stock (“Third-Party Acquisition”).
|
F-12
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
8. Convertible Notes Payable – Bridge Loans (continued)
The notes are convertible, at the holder’s option, into Ceelox Private’s Common Stock or in connection with a Reverse Merger such public company’s common stock in accordance with certain terms of the agreement at $0.81 per share of the Company’s Common stock.
Purchasers in this offering are granted warrants to purchase that number of shares of Common Stock equal to the principal amount of their note divided by the applicable conversion price of the notes as described above and the exercise price per share shall be equal to the conversion price of the notes. Upon the Merger, 777,451 of warrants were issuable under this agreement.
During the year ended December 31, 2011, holders of notes with a face value totaling $345,000 converted the face value plus accrued interest of $8,476 into 436,391 post merger common shares. Unamortized discounts of $25,069 were charged to interest expense upon conversion. Additionally, during the years ended December 31, 2012 and 2011, Ceelox Private recorded amortization of discounts in the amount of $538 and $11,875 related to unconverted instruments, respectively. As of December 31, 2012 and 2011, the carrying amounts of convertible bridge notes were $188,489 and $331,385, net of $0 and $538 in un-amortized discount, respectively.
On January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,927 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. As a result, $156,352 of the convertible notes payable – bridge loans were converted. As of December 31, 2012, $188,489 of the convertible notes payable – bridge loans are considered in default.
9. Notes Payable – Related Party
On March 31, 2011, Ceelox issued a promissory note to a related party in the amount of $110,000. The note is payable on demand and has an interest rate of 0.55%. The note was given in exchange for funds advanced to the Company to pay fees related to various consulting agreements. Interest expense for the years ended December 31, 2012 and 2011 amounted to $40 and $462, respectively.
On June 30, 2011, Ceelox issued a promissory note to a related party in the amount of $364,791. The note is payable on demand and has an interest rate of 0.55%. The note was given in exchange for funds advanced to the Company to pay fees related to various consulting agreements. Interest expense for the years ended December 31, 2012 and 2011 amounted to $134 and $1,025.
On September 30, 2011, Ceelox issued a promissory note to a related party in the amount of $78,086. The note is payable on demand and has an interest rate of 0.55%. The note was given in exchange for funds advanced to the Company to pay fees related to various consulting agreements. Interest expense for the years ended December 31, 2012 and 2011 amounted to $261 and $110.
On December 31, 2011, Ceelox issued a promissory note to a related party in the amount of $73,947. The note is payable on demand and has an interest rate of 0.55%. The note was given in exchange for funds advanced to the Company to pay fees related to various consulting agreements. Interest expense for the years ended December 31, 2012 and 2011 amounted to $413 and $0.
F-13
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
9. Notes Payable – Related Party (continued)
On January 24, 2012, CIP, the Company’s majority shareholder executed a majority shareholder written consent authorizing Ceelox Sub to deliver all of the Collateral to CIP on January 27, 2012 in exchange for CIP’s agreement to forgive all debt (other than an aggregate of $118,761 which shall remain due and owing to CIP) in exchange for the Company’s issuance of 24,000,000 shares of its common stock. In this agreement, Ceelox converted approximately $9,460,000 in debt to 24 million shares of common stock and turned over all intellectual property and software to CIP. As a result $505,670 of the notes payable – related party was converted.
10. Secured Convertible Note Financing
As reported in the Company’s Form 8-K filed with the SEC on February 22, 2012: On February 16, 2012 the Company entered into a securities purchase agreement with one investor for the purchase and sale of a convertible promissory note (“Note”) in the principal amount of $187,500 and a warrant to purchase shares of the Company’s common stock. The number of warrant shares exercisable is equal to the number of shares equal to 20% of the quotient obtained by dividing (i) the principal amount of the Note ($187,500) by (ii) the Conversion Price of the Company’s common stock. Additionally, the Company entered into a security agreement with the investor whereby the Company’s obligation to repay the Note is secured by all of the Company’s assets.
After the payment of fees, expenses and the prepayment of interest, the Company received net proceeds of $104,625.
Pursuant to the terms of the Note, the maturity date of the Note is February 16, 2013 (“Maturity Date”) and all of the interest due under the Note during the initial term was prepaid by the Company upon issuance of the Note. Upon the earlier of the completion of a Qualified Offering, or the Maturity Date, the investor shall have the right to convert the Note into shares of the Company’s common stock. The number of shares into which the Note may be converted shall be determined by dividing the conversion amount of the Note by the conversion price. The conversion price shall be determined as follows: (i) a 25% discount from the price per share (denominated in US dollars) at which the common stock is sold in a Qualified Offering (such price at which the common stock is sold in a Qualified Offering is referred to as the “Offering Price”) if the Qualified Offering occurs on or before the six (6) month anniversary of the final Closing Date; (ii) a 40% discount from the Offering Price if a Qualified Offering occurs after the six (6) month anniversary of the final Closing Date but on or before the twelve (12) month anniversary of the final Closing Date; or (iii) the greater of (x) a 40% discount from the VWAP of the common stock over the five (5) trading days prior to conversion, and (y) $0.10 per share if a Qualified Offering does not occur on or prior to the twelve (12) month anniversary of the final Closing Date. For purposes hereof, the final Closing Date shall be the earlier of February 28, 2012 and the sale of an aggregate of $500,000 principal amount of the Notes. As of December 31, 2012, this note is in default. However, the Company is in negotiations with a third party to secure financing in which part of the use of proceeds will be to repay the Note.
The Company issued a five year warrant to the investor pursuant to which the investor shall have the right to acquire additional shares of the Company’s common stock. The number of shares of common stock issuable upon exercise of the warrant shall be determined by dividing the principal amount of the Note by the Conversion Price (as defined above pursuant to the Note) multiplied by twenty percent (20%). Subsequent to December 31, 2012, the Company is in default in repayment of the note. However, the Company is in negotiation with a third party to secure financing in which part of the use of the proceeds will be used to repay the note.
F-14
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
10. Secured Convertible Note Financing (continued)
Accounting for the Secured Convertible Notes
We have evaluated the terms and conditions of the secured convertible note and warrants under the guidance of ASC 815, Derivatives and Hedging. Both the embedded conversion feature and detachable warrants have a variable conversion price, which precludes these instruments from being indexed to the Company’s own stock. As a result, both the embedded conversion feature and warrants require classification as liabilities.
The following tables reflect the allocation of the purchase on the financing dates:
|
|
$187,500
|
Secured Convertible Note
|
|
Face Value
|
Proceeds
|
|
$
|
104,625
|
Embedded conversion feature
|
|
|
(251,852)
|
Warrant derivative liability
|
|
|
(55,370)
|
Prepaid interest
|
|
|
24,375
|
Deferred finance fees
|
|
|
58,500
|
Carrying value
|
|
$
|
-
|
Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is lower than face value. Discounts (premiums) are amortized through charges (credits) to interest expense over the term of the debt agreement.
For the year ended December 31, 2012, the Company recorded interest expense related to the amortization of debt discount in the amount of $87,034. The carrying value of the secured convertible note at December 31, 2012 was $87,034.
11. Derivative Financial Instruments
The components of warrant derivative liability as reflected in the condensed consolidated balance sheet as of December 31, 2012:
|
December 31, 2012
|
Secured convertible note financing giving rise to derivative financial instruments:
|
Indexed Shares
|
|
Fair Value
|
Embedded conversion feature
|
3,125,000
|
|
$
|
2,488
|
Warrant derivative liability
|
625,000
|
|
|
6,212
|
Carrying value
|
3,750,000
|
|
$
|
8,700
|
F-15
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
11. Derivative Financial Instruments (continued)
The following table summarizes the effects on our gain (loss) associated with changes in the fair values of our derivative financial instruments by type of financing for the year ended December 31, 2012:
Secured convertible note financing giving rise to derivative financial instruments and the
income effect:
|
|
Year Ended
December 31, 2012
|
Embedded conversion feature
|
|
$
|
249,364
|
Warrant derivative liability
|
|
|
49,158
|
|
|
|
298,522
|
|
|
|
|
Day-one derivative loss
|
|
|
(119,722)
|
Total derivative gain (loss)
|
|
$
|
178,800
|
12. Fair Value Considerations
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:
Level 1
valuations
:
|
|
Quoted prices in active markets for identical assets and liabilities.
|
Level 2
valuations
:
|
|
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or 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. As of December 31, 2011 there was no assets or liabilities measured at fair value.
F-16
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
12. Fair Value Considerations (continued)
The following table presents information about the Company’s liabilities measured at fair value as of December 31, 2012:
|
Fair Value Measurements Using:
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets (Liabilities)
at Fair Value
|
Warrant Derivative liabilities
|
$
|
-
|
|
$
|
-
|
|
$
|
6,212
|
|
$
|
6,212
|
Embedded Conversion Feature
|
|
|
|
|
|
|
|
2,488
|
|
|
2,488
|
Total
|
$
|
-
|
|
$
|
-
|
|
$
|
8,700
|
|
$
|
8,700
|
Both the embedded conversion feature and warrants were valued using a binomial-lattice-based valuation model. The lattice-based valuation technique was utilized because it embodies all of the requisite assumptions (including the underlying price, exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weighted to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock. Because derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.
Significant assumptions in valuing the embedded conversion feature (“ECF”) and warrant liability were as follows as of December 31, 2012:
|
|
ECF
|
|
|
Warrants
|
|
Exercise price
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
Volatility
|
|
|
338.16
|
%
|
|
|
309.62
|
%
|
Equivalent term (years)
|
|
|
0.13
|
|
|
|
4.13
|
|
Risk-free interest rate
|
|
|
0.05
|
%
|
|
|
0.62
|
%
|
F-17
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
12. Fair Value Considerations (continued)
The following table sets forth a reconciliation of changes in the fair value of financial liabilities classified as Level 3 in the fair valued hierarchy:
|
|
Derivative Instruments
|
|
|
|
2012
|
|
Balance as of January 1, 2012:
|
|
$
|
|
|
Total losses (realized or unrealized):
|
|
|
|
|
Included in earnings
|
|
|
298,522
|
|
Embedded conversion feature issuances
|
|
|
(251,852
|
)
|
Warrant issuances
|
|
|
(55,370
|
)
|
Balance as of December 31, 2012
|
|
$
|
(8,700
|
)
|
13. Notes Payable
On May 18, 2012, the Company sold a $125,000 convertible promissory note (“Note”) to an investor. In connection with the sale of the Note the Company also issued the investor a warrant to purchase shares of the Company’s common stock (“Warrant”). The Note is due and payable on November 18, 2012 and bears interest at a rate of 13% per annum, all of which shall be paid on the maturity date. The Company may prepay the Note and accrued interest in whole or in part at any time prior to the maturity date without penalty. An event of default shall occur in the event the Company fails to make the principal and interest payment to the investor on or prior to the maturity date. The Warrant issued to the investor allows the investor to acquire up to 250,000 shares of the Company’s common stock at a price of $0.10 per share for a period of five years from the date of issuance of the warrant. We have evaluated the terms and conditions of the warrants under the guidance of ASC 815, Derivatives and Hedging and determined that they achieved equity classification. The warrants did not contain any terms or feature that would preclude equity classification.
The purchase price allocation for the convertible notes resulted in a debt discount of $120,050. The discount on the notes will be amortized through periodic charges to interest expense over the term of the debenture using the effective interest method. Amortization of debt discount amounted to $3,278 during the nine month period ended September 30, 2012. The purchase price allocation is as follows:
|
|
Inception
|
|
Net proceeds
|
|
$
|
125,000
|
|
Carrying value
|
|
|
(120,050
|
)
|
Paid in capital (warrants)
|
|
|
(4,950
|
)
|
The warrants were recorded as a discount to the note and will be accreted to face value over the life of the loan.
Between August 8, 2012 and December 31, 2012, the Company received additional tranches of funding related to the May 18, 2012 note agreement aggregating $308,458.
For the years ended December 31, 2012, the Company recorded $17,017 in interest expense related to this note.
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
14. Equity Activity
Warrants
:
The following table summarizes the activity related to warrants for the period from January 1, 2011 through December 31, 2012:
|
|
Warrants
|
|
WAVG Strike Price
|
January 1, 2011
|
|
6,254,783
|
|
3.23
|
Granted
|
|
-
|
|
-
|
Exercised
|
|
-
|
|
-
|
Cancelled or expired
|
|
-
|
|
-
|
December 31, 2011
|
|
6,254,783
|
|
3.23
|
Granted
|
|
875,000
|
|
0.32
|
Exercised
|
|
-
|
|
-
|
Cancelled or expired
|
|
-
|
|
-
|
December 31, 2012
|
|
7,129,783
|
|
3.27
|
Exercisable at December 31, 2012
|
|
7,129,783
|
|
3.27
|
The warrants expire at various dates ranging from August 21, 2014 through May 18, 2017 and have an average exercise price of $1.42.
Investment Banking Agreement
On October 8, 2010, the Company entered into an agreement with the firm for continued investment banking and financial advisory services. As consideration for these services, pursuant to the Agreement, the Company agreed to issue (i) 150,000 shares of common stock no later than March 1, 2011, (ii) nine (9) consecutive monthly payments of $15,000 commencing on November 1, 2010, and (iii) $45,000 upon execution of the agreement. The agreement states that the common stock is earned over twelve (12) consecutive months at 12,500 shares per month. The agreement is retroactive to August 1, 2010. During the years ended December 31, 2012 and 2011, the Company recorded stock-based compensation of $52,125 and $62,500, respectively, related to this agreement. On March 1, 2011, the Company issued 150,000 shares for services rendered from August 2010 through July 2011.
On November 21, 2011 and revised on March 21, 2012, the Company entered into an additional agreement with the firm for continued investment banking and financial advisory services. As consideration for these services, pursuant to the Agreement, the Company agreed to issue (i) 2,500,000 shares of common stock upon execution of the agreement and, (ii) $100,000 upon the closing of a bridge financing in the minimum amount of $1,500,000. The agreement states that in the event the funding is not completed, the firm will agree to defer the compensation until a funding is completed. The agreement is retroactive to July 1, 2011. During the years ended December 31, 2012 and 2011, the Company recorded stock-based compensation of $75,000 and $0, respectively, related to this agreement. On December 29, 2011, the Company issued 2,500,000 shares in connection with the agreement.
On February 21, 2012, the Company entered into an agreement with a firm for non-exclusive investment banking and financial advisory services. As consideration for these services, pursuant to the Agreement, the Company agreed to issue (i) 400,000 restricted common shares, payable in four equal quarterly installments beginning on the date of execution of this Agreement, (ii) fees associated with the raising of capital of 10% cash and 10% in warrants on equity-linked capital raised (i.e., common equity, preferred equity, convertible debt, debt with warrants), and 3% cash and no warrants on straight debt capital raised and (iii) fees associated with merger and acquisitions of 5% of the consideration up to $5 million, 3% of the consideration between $5-10 million, and 1% of consideration above $10 million. At the Company’s discretion, $5,000 may be paid in lieu of the restricted shares as quarterly compensation. The warrants will be struck at a 20% premium to the valuation of said financing event, have a five-year expiration, and have a cashless exercise feature. The term of the agreement is 12 months and can be terminated upon 10 days written notice without cause by either the Company or the firm at any time before the Expiration Date. For year ended December 31, 2012, $1,000 in consulting expenses has been incurred. On May 4, 2012, the Company issued 100,000 shares of common stock to an investing banking group in accordance with the terms of the agreement.
F-19
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
14. Equity Activity (continued)
On March 29, 2012, the company entered into an agreement with a firm to provide general financial advisory and M&A advisory services to the Company. The terms of the engagement, which is modified from the original agreement signed on December 1, 2011, are for a term of six (6) months which will commence on the closing of the current Ceelox agreement. The firm will serve as the Company’s non-exclusive financial advisor and to provide agreed upon general financial advisory and investment banking advisor services. As consideration for these services, the Company has agreed to compensate the firm as follows: (a) Sixty thousand dollars ($60,000) in the form of six (6) consecutive monthly payments of $10,000; (b) In the event that the firm identifies, negotiates, and acts as an advisor on a M&A assignment. Ceelox agrees to pay the greater of $75,000 or a fee equal to 5% of the first $5 million of Consideration paid, plus 3% of the second $5 million of Consideration paid, plus 1% of the Consideration paid thereafter (on any Acquirer or Acquiree Transaction) for any merger, asset sale, stock swap, or any transaction or combination other than the ordinary course of business, whereby, directly or indirectly, control of or an asset is transferred for any Consideration (defined below) including, without limitation, cash and/or non-cash consideration. Payment will be due upon closing of the transaction. The terms of this agreement do not commence until the completion of the March 21, 2012 agreement.
Legal Services Agreement
On January 21, 2012, the Company contracted with a legal firm to (i) assist the Company with a potential acquisition of target companies for asset acquisitions, (ii) assist the Company with a proposed private financing for which a $50,000 retainer was paid by the Company and (iii) assist the Company with a future acquisition. In exchange for services, the company will be billed at an hourly rate for work performed on behalf of the Company. The current hourly rates for firm personnel range from $390 to $895 for partners, from $225 to $545 for associates, $90 to $315 for paralegals, clerks and librarians, and other members of our staff. During the year ended December 31, 2012, the Company paid a $50,000 retainer for their use of services. The retainer was paid out of the proceeds of the secured convertible note financing dated February 16, 2012. $12,500 of which has been recorded as legal fees.
Placement Agent Agreement
On May 11, 2012, the Company entered into an agreement with a firm for exclusive placement agent agreement for the private placement of securities. As consideration for these services, pursuant to the Agreement, the Company agreed (i) to pay, at the signing of this agreement $25,000 cash, and 30 days from the signing of this agreement an additional $10,000 cash as a non-refundable retainer that is creditable to the placement fee described herein (ii) a cash fee payable upon each closing of a transaction closing equal to 10% of the gross proceeds received by the Company from sources of capital introduced by the placement agent (iii) a cash fee if the Company or any of its advisors or affiliates sources any capital investment into the Company equal to 4% of such gross proceeds (iv) pay placement agent a corporate finance fee payable in cash upon each closing equal to 2% of the gross proceeds (v) warrants to the placement agent to purchase shares of the Company’s common stock equal to 10% of the number of shares of common stock underlying the securities issued in the offering. Warrants will be issued at each closing and shall provide (a) be exercisable at an exercise price equal to the price of the securities issued to the investors in the offering, (b) expire five (5) years from the date of issuance, (c) contain anti-dilution protection provided to the investors, (d) same registration rights provided to the investors, and (e) provisions for cashless exercise. The term of the agreement is 6 months and can be terminated upon 30 days written notice without cause by either the Company or the placement agent at any time before the Expiration Date. The contract was not renewed or extended after the original contract term.
F-20
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
14. Equity Activity (continued)
Stock Option Plans
As of January 1, 2010 Ceelox Private had one stock option plan under which grants were outstanding. Grants under the stock option plan typically had a requisite service period of 36 months, straight-line or graded vesting schedules and expired not more than ten years from date of grant. The Plan was approved by the Ceelox Private board on January 2, 2007.
On February 12, 2010, at the time of the reverse merger, the Company adopted the 2010 Stock Option Plan (the “Plan”) providing for stock-based incentive compensation to eligible employees, executive officers and non-employee directors and consultants. Grants under the Plan typically have a requisite service period of 36 months, straight-line or graded vesting schedules and expire not more than ten years from date of grant.
As of December 31, 2012 and 2011, 3,818,889 shares of the 6,000,000 shares approved under the Company’s Plan remain available for grant.
General Stock Option Information
The following table summarizes stock option activity under 2007 Plan for the years ended December 31, 2012 and 2011, and information regarding stock options outstanding, exercisable, and vested and expected to vest as of December 31, 2012.
|
|
Number of
|
|
|
Weighted Average
|
|
Weighted Average
|
|
|
Options
|
|
|
Exercise Price
|
|
Contractual Term
|
Outstanding at January 1, 2011
|
|
|
2,279,430
|
|
|
$
|
0.27
|
|
4.65 years
|
Granted
|
|
|
195,000
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
(293,319
|
)
|
|
$
|
0.54
|
|
|
Outstanding at December 31, 2011
|
|
|
2,181,111
|
|
|
$
|
0.27
|
|
4.65 years
|
Granted
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
2,181,111
|
|
|
$
|
0.27
|
|
4.65 years
|
Range of
Exercise Prices
|
|
|
Options O/S
|
|
|
Weighted Average
Life (Years)
|
|
|
Weighted Average
Price
|
|
|
Options
Exercisable
|
|
|
Weighted Average
Price
|
|
$
|
0.09 – 0.41
|
|
|
|
2,042,222
|
|
|
|
1.25
|
|
|
$
|
0.021
|
|
|
|
2,042,222
|
|
|
$
|
0.021
|
|
$
|
0.99
|
|
|
|
138,889
|
|
|
|
3.09
|
|
|
$
|
0.110
|
|
|
|
138,889
|
|
|
$
|
0.110
|
|
F-21
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
14. Equity Activity (continued)
On February 24, 2011, the Company issued options totaling 195,000 to six of its employees with a strike price of $0.55, which 50% of the options vest on or after February 17, 2012 and the remaining 50% vest on or after February 17, 2013. In the event of a merger or consolidation of the Company with or into another corporation or entity in which the Company does not survive, or in the event of a sale of all or substantially all of the assets of the Company in which the stockholders of the Company receive securities of the acquiring entity or an affiliate thereof, all options immediately vest and become exercisable as of the day immediately preceding any such event. Additionally, in the event that the Company receives gross proceeds of a minimum of $2,500,000 in equity, or equity-linked, securities from a non-affiliated third party(ies), all options immediately vest and become exercisable upon the Company’s receipt of any such proceeds.
As of December 31, 2012 and December 31, 2011, there was $0 and $0 of total unrecognized compensation cost, net of expected forfeitures, related to unvested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2 years and 4 years.
Stock-Based Compensation
Stock Options
During the years ended December 31, 2012 and 2011, the Company recorded stock-based compensation related to stock options of $0 and $13,483, respectively.
15. Income Taxes
Income tax benefit resulting from applying statutory rates in jurisdictions in which we are taxed (Federal and State of Florida) differs from the income tax provision (benefit) in our financial statements. The following table reflects the reconciliation for the years ended December 31, 2012 and 2011:
|
Year Ended December 31,
|
|
2012
|
2011
|
Benefit at federal and statutory rate
|
(34)%
|
(34)%
|
Change in valuation allowance
|
34 %
|
34 %
|
Effective tax rate
|
0 %
|
0 %
|
Deferred income taxes arise from temporary differences in the recognition of certain items for income tax and financial reporting purposes. The approximate tax effects of significant temporary differences which comprise the deferred tax assets and liabilities are as follows:
|
Year Ended December 31,
|
|
|
2012
|
|
2011
|
Net operating loss carry-forward
|
$
|
7,360,000
|
$
|
7,119,000
|
Property and equipment
|
|
-
|
|
-
|
Compensation arising from share-based payment
|
|
378,000
|
|
378,000
|
Amortization of intangible assets
|
|
-
|
|
-
|
Valuation allowance
|
|
(7,738,000)
|
|
(7,497,000)
|
Net deferred tax assets (liabilities)
|
$
|
-
|
$
|
-
|
F-22
CEELOX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
15. Income Taxes (continued)
As of December 31, 2012, we have $28,250,000 in net operating loss carry forward that, subject to limitation, may be available in future tax years to offset taxable income. The net operating loss carry forwards expire through 2032.
The amount of income taxes and related income tax positions taken are subject to audits by federal and state tax authorities. As of December 31, 2012, the Company’s most recently filed income tax return dates are as of December 31, 2011, and generally three years of income tax returns commencing with that date are subject to audit by these authorities. Our estimate of the potential outcome of any uncertain tax positions is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time, pursuant to ASC 740, Income Taxes. ASC 740 requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company’s policy is to record a liability for the difference between the benefit recognized and measured pursuant to ASC 740 and tax position taken or expected to be taken on the tax return. Then, to the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company reports tax-related interest and penalties as a component of income tax expense. During the periods reported, management of the Company has concluded that no significant tax position requires recognition under ASC 740.
16. Subsequent Events
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 an extend the termination date of the agreement to April 30, 2013. The agreement between the Company and SendGlobal terminates on April 25, 2013.
On February 21, 2012, the Company entered into an agreement with a firm for non-exclusive investment banking and financial advisory services. On January 9, 2013, as consideration for these services, pursuant to the Agreement, the Company issued the final installment of 100,000 shares of common stock to an investing banking group.
F-23