UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________
to __________________________
Commission file number: 000-52524
THINSPACE TECHNOLOGY, INC. |
(Exact name of registrant as specified in its charter) |
Delaware |
|
43-2114545 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
5535 S. Williamson Blvd, Unit
751
Port Orange, FL |
|
32128 |
(Address of principal executive offices) |
|
(zip code) |
(786) 763-3830 |
(Registrant's telephone number, including area code) |
N/A |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer o |
|
Accelerated filer o |
Non-accelerated
filer o
(Do not check if smaller reporting company) |
|
Smaller reporting company þ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ
Indicated the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable date, 99,398,536 shares of common stock are issued
and outstanding as of November 13, 2014.
TABLE OF CONTENTS
|
|
Page No. |
PART I. - FINANCIAL INFORMATION |
Item 1. |
Financial Statements. |
3 |
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations. |
14 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. |
18 |
Item 4 |
Controls and Procedures. |
18 |
PART II - OTHER INFORMATION |
Item 1. |
Legal Proceedings. |
18 |
Item 1A. |
Risk Factors. |
18 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
18 |
Item 3. |
Defaults Upon Senior Securities. |
19 |
Item 4. |
Mine Safety Disclosures. |
19 |
Item 5. |
Other Information. |
19 |
Item 6. |
Exhibits. |
20 |
THINSPACE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
September 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
| |
(Unaudited) | | |
| |
Assets | |
| | |
| |
| |
| | |
| |
Current assets: | |
| | |
| |
Cash and cash equivalents | |
$ | 81,897 | | |
$ | 341,031 | |
Receivable from sale of preferred stock | |
| - | | |
| 472,000 | |
Accounts receivable | |
| 319,853 | | |
| 387,279 | |
Inventory | |
| 45,954 | | |
| 4,634 | |
Prepaid expenses and other current assets | |
| 98,778 | | |
| 36,263 | |
| |
| | | |
| | |
Total current assets | |
| 546,482 | | |
| 1,241,207 | |
| |
| | | |
| | |
Fixed assets, net of accumulated depreciation of $70,940 and $60,312, respectively | |
| 37,572 | | |
| 31,325 | |
Intangible assets, net of accumulated amortization of $495,505 and $454,416, respectively | |
| 164,350 | | |
| 194,743 | |
Prepaid stock based compensation | |
| 312,500 | | |
| - | |
Other assets | |
| 10,711 | | |
| 3,049 | |
| |
| | | |
| | |
Total assets | |
$ | 1,071,615 | | |
$ | 1,470,324 | |
| |
| | | |
| | |
Liabilities and stockholders' deficit | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 1,585,630 | | |
$ | 1,610,753 | |
Deferred revenue | |
| 1,126,929 | | |
| 1,482,504 | |
Loans payable, current portion | |
| 14,800 | | |
| 74,800 | |
Loans payable - related parties | |
| - | | |
| 117,348 | |
Derivative liabilities | |
| 31,240,660 | | |
| 11,268,087 | |
Total current liabilities | |
| 33,968,019 | | |
| 14,553,492 | |
| |
| | | |
| | |
Deferred revenue, long term | |
| 60,429 | | |
| 73,897 | |
Convertible notes payable, net of discount of $1,195,341 and $311,806, respectively | |
| 921,240 | | |
| 862,019 | |
Loans payable | |
| 13,392 | | |
| 25,266 | |
| |
| | | |
| | |
Total liabilities | |
| 34,963,080 | | |
| 15,514,674 | |
| |
| | | |
| | |
Stockholders' deficit | |
| | | |
| | |
| |
| | | |
| | |
Preferred stock, undesignated, authorized 49,253,000 shares, $0.001 par value, no shares issued and outstanding, respectively | |
| - | | |
| - | |
Preferred stock, Series B, authorized 75,000 shares, $0.001 par value, 75,000 shares issued and outstanding | |
| 75 | | |
| 75 | |
Preferred stock, Series C, authorized 672,000 shares, $0.001 par value, 672,000 shares issued and outstanding | |
| 672 | | |
| 672 | |
Common stock authorized 500,000,000 shares, $0.001 par value, 96,883,942 and 82,819,694 shares issued and outstanding, respectively | |
| 96,884 | | |
| 82,820 | |
Additional paid in capital | |
| 5,197,809 | | |
| - | |
Accumulated deficit | |
| (39,147,538 | ) | |
| (14,093,652 | ) |
Accumulated other comprehensive income (loss) | |
| (39,367 | ) | |
| (34,265 | ) |
Total stockholders' deficit | |
| (33,891,465 | ) | |
| (14,044,350 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' deficit | |
$ | 1,071,615 | | |
$ | 1,470,324 | |
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
THINSPACE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
FOR THE NINE AND THREE MONTH PERIODS
ENDED SEPTEMBER 30, 2014 AND 2013
(Unaudited)
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Revenues | |
$ | 2,322,170 | | |
$ | 411,606 | | |
$ | 5,700,775 | | |
$ | 984,135 | |
Cost of goods sold | |
| 1,488,293 | | |
| 214,252 | | |
| 3,332,524 | | |
| 583,497 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 833,877 | | |
| 197,354 | | |
| 2,368,251 | | |
| 400,638 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expense: | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative | |
| 1,486,697 | | |
| 632,175 | | |
| 4,735,832 | | |
| 1,269,860 | |
Depreciation and amortization | |
| 20,964 | | |
| 18,275 | | |
| 60,999 | | |
| 51,405 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expense | |
| 1,507,661 | | |
| 650,450 | | |
| 4,796,831 | | |
| 1,321,265 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (673,784 | ) | |
| (453,096 | ) | |
| (2,428,580 | ) | |
| (920,627 | ) |
| |
| | | |
| | | |
| | | |
| | |
(Loss) gain on change in fair value of derivative liability | |
| (16,556,422 | ) | |
| - | | |
| (15,447,215 | ) | |
| - | |
Gain on conversion of debt | |
| 20,979 | | |
| - | | |
| 176,108 | | |
| - | |
Interest expense (income) | |
| (1,883,300 | ) | |
| (67 | ) | |
| (7,354,199 | ) | |
| 116 | |
| |
| | | |
| | | |
| | | |
| | |
Loss before provision for income taxes | |
| (19,092,527 | ) | |
| (453,163 | ) | |
| (25,053,886 | ) | |
| (920,511 | ) |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (19,092,527 | ) | |
| (453,163 | ) | |
| (25,053,886 | ) | |
| (920,511 | ) |
Preferred dividend | |
| (1,875 | ) | |
| - | | |
| (5,625 | ) | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net loss attributable to common shareholders | |
$ | (19,094,402 | ) | |
$ | (453,163 | ) | |
$ | (25,059,511 | ) | |
$ | (920,511 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted loss per share | |
$ | (0.20 | ) | |
$ | (0.01 | ) | |
$ | (0.27 | ) | |
$ | (0.01 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding,
Basic and diluted | |
| 96,085,012 | | |
| 80,200,000 | | |
| 92,807,067 | | |
| 80,200,000 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income (loss): | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (19,092,527 | ) | |
$ | (453,163 | ) | |
$ | (25,053,886 | ) | |
$ | (920,511 | ) |
Foreign currency translation adjustments | |
| 13,136 | | |
| (80 | ) | |
| (5,102 | ) | |
| (6,012 | ) |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive loss | |
$ | (19,079,391 | ) | |
$ | (453,243 | ) | |
$ | (25,058,988 | ) | |
$ | (926,523 | ) |
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
THINSPACE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER
30, 2014 AND 2013
(Unaudited)
| |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Cash flows from operating activities: | |
| | |
| |
Net loss | |
$ | (25,053,886 | ) | |
$ | (920,511 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 60,999 | | |
| 51,405 | |
Amortization of prepaid stock based compensation | |
| 937,500 | | |
| - | |
Stock based compensation | |
| 669,678 | | |
| - | |
Gain on conversion of debt | |
| (176,108 | ) | |
| - | |
Change in fair value of derivative liability | |
| 15,447,215 | | |
| - | |
Amortization of debt discount | |
| 6,814,247 | | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 64,722 | | |
| (274,036 | ) |
Inventory | |
| (42,606 | ) | |
| 97,038 | |
Prepaid expenses and other current assets | |
| (63,573 | ) | |
| (16,115 | ) |
Other assets | |
| (7,763 | ) | |
| (765 | ) |
Accounts payable and accrued expenses | |
| (172 | ) | |
| 194,882 | |
Deferred revenue | |
| (367,243 | ) | |
| 941,339 | |
| |
| | | |
| | |
Net cash (used in) provided by operating activities | |
| (1,716,990 | ) | |
| 73,237 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Cash paid for fixed assets | |
| (18,421 | ) | |
| (47,187 | ) |
| |
| | | |
| | |
Net cash used in investing activities | |
| (18,421 | ) | |
| (47,187 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from sale of preferred stock | |
| 472,000 | | |
| - | |
Proceeds from notes payable | |
| 1,191,000 | | |
| - | |
Repayment of note | |
| (75,000 | ) | |
| - | |
Repayment of loan | |
| (11,583 | ) | |
| (11,305 | ) |
Advances from related parties | |
| 21,000 | | |
| 42,518 | |
Repayments to related parties | |
| (118,670 | ) | |
| - | |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 1,478,747 | | |
| 31,213 | |
| |
| | | |
| | |
Effect of exchange rate changes on cash | |
| (2,470 | ) | |
| (6,012 | ) |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (259,134 | ) | |
| 51,251 | |
Cash, beginning of period | |
| 341,031 | | |
| 51,323 | |
Cash, end of period | |
$ | 81,897 | | |
$ | 102,574 | |
| |
| | | |
| | |
Supplemental Schedule of Cash Flow Information: | |
| | | |
| | |
Cash paid for interest | |
$ | 288,689 | | |
$ | 68 | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Fair value of common stock issued upon conversion of notes | |
$ | 1,348,968 | | |
$ | - | |
Note payable converted to common stock | |
| 233,244 | | |
| - | |
Accrued interest converted to common stock | |
| 11,410 | | |
| - | |
Derivative liability reclassified to equity upon conversion of debt | |
| 1,348,684 | | |
| - | |
Derivative liability reclassified to equity upon expiration of warrants | |
| 1,892,000 | | |
| - | |
Derivative liability of debt issued | |
| 5,959,048 | | |
| - | |
Common stock issued as payment of prepaid consulting fees | |
| 1,250,000 | | |
| - | |
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
THINSPACE
TECHNOLOGY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2014 AND 2013
(Unaudited)
NOTE
1 – ORGANIZATION AND LINE OF BUSINESS
COMPANY
OVERVIEW
Nature
of Operations
THINSPACE
TECHNOLOGY, INC. (formerly Vanity Events Holding, Inc.) (the “Company”, “Thinspace” “we”,
“us” or “our”), was organized as a Delaware corporation on August 25, 2004, and is a holding company.
We are a cloud computing company that develops software productivity solutions that allow our customers secure access
to centrally managed desktop or software applications and to work and collaborate from anywhere, accessing enterprise
apps and data on any of the latest devices, as easily as they would in their own office- simply and securely.
The
Company’s principal activity is the development and sale of network software. The company has 5 key products:
● |
Thinspace
TSE - a simple management solution for Microsoft remote desktop users. |
● |
Thinspace
OneGate - allows secure remote access to applications and data from outside of the corporate network. |
● |
Thinspace
Universal Client – provides access to applications or Windows desktops from iPad, iPhone or Android tablet or Smartphone. |
● |
Thinspace
Pano – The Pano is a Zero Client that replaces traditional desktops, allows secure fast access to hosted
virtual desktops. |
● |
Thinspace
Client– A branded hardware Thin Client solution aimed for the enterprise and corporate market. |
We
sell directly to independent software vendors and Application Service Providers (ASPs) and to end users through a chain of distributors
and resellers. Our larger customers are predominantly large businesses based around the world, with a concentration in North
America, the Far East and India.
Our
operating subsidiaries are Thinspace Technology Ltd (“Thinspace UK”), organized and operating in the United Kingdom,
and Thinspace Technology Ltd. (“Thinspace USA”), a Nevada corporation formed on August 24, 2010 and operating in the
states of California, Colorado and Florida.
Pursuant
to an Agreement of Merger and Reorganization dated December 31, 2013 between the Company, VAEV Merger Sub, Inc., and Thinspace
UK, VAEV Merger Sub merged with Thinspace UK and all of the issued and outstanding shares of Thinspace UK were exchanged for 80,200,000
shares of common stock of the Company. The transaction has been accounted for as a reverse acquisition of Vanity by Thinspace
UK but in substance as a capital transaction, rather than a business combination since Vanity had minimal operations and assets
as of the closing of the transaction. The stockholders of Thinspace UK owned a majority of the Company’s voting power immediately
following the transaction and Thinspace UK’s management assumed operational, management and governance control of the Company.
The transaction is deemed as reverse recapitalization and the accounting is similar to that resulting from a reverse acquisition,
except that no goodwill or other intangible assets should be recorded. Thinspace UK is treated as the surviving and
continuing entity. The Company did not recognize goodwill or any intangible assets in connection with this transaction.
Accordingly, the Company’s historical financial statements are those of Thinspace UK and its subsidiary, Thinspace USA.
Vanity
assets and liabilities retained subsequent to the transaction are as follows:
Cash | |
$ | 9,848 | |
Other assets | |
| 1,349 | |
Accounts payable and accrued expenses | |
| (1,032,603 | ) |
Notes payable | |
| (922,019 | ) |
Derivative liabilities | |
| (8,504,326 | ) |
Net liabilities retained | |
$ | (10,447,751 | ) |
We
changed the fiscal year end of Thinspace UK and Thinspace USA to December 31 to match that of Vanity prior to the reverse
acquisition.
References
herein to “Vanity” refer to the Company prior to the reverse acquisition.
BASIS
OF PRESENTATION AND GOING CONCERN
Basis
of Presentation
The
accompanying condensed consolidated financial statements are unaudited. The unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP")
and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information
and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make
the information not misleading.
These
interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2014 and 2013
are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods
presented. The results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to
be expected for the year ending December 31, 2014 or for any future period. All references to September 30, 2014 and 2013 in these
footnotes are unaudited.
These
unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial
statements and the notes thereto for the transition period ended December 31, 2013, included in the Company’s transition
report on Form 10-K/A filed with the SEC on May 13, 2014.
The
condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements
at that date but do not include all disclosures required by GAAP.
Going
Concern
We
have incurred a loss from operations of $2,428,580 for the nine months ended September 30, 2014. As of September 30, 2014 we have
negative working capital of $33,421,537 and a stockholders’ deficit of $33,891,465. As a result, there is substantial doubt
about the Company’s ability to continue as a going concern at September 30, 2014.
Management
has implemented its business plan to add new products, increase marketing activities and, as a result, increase revenue. Our ability
to continue to implement our current business plan and continue as a going concern ultimately is dependent upon our ability to
obtain additional equity or debt financing, attain further operating efficiencies and to achieve profitable operations.
There
can be no assurances that funds will be available to the Company when needed or, if available, that such funds will be available
under favorable terms. In the event that the Company is unable to generate adequate revenues to cover expenses and cannot obtain
additional funds in the near future, the Company may seek protection under bankruptcy laws. To date, management has not
considered this alternative, nor does management view it as a likely occurrence, since the Company is progressing with various
potential sources of new capital and we anticipate a successful outcome from these activities. However, capital markets remain
difficult and there can be no certainty of a successful outcome from these activities.
The
accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue
as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities
in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION
The
condensed consolidated financial statements include the accounts of Thinspace Technology, Inc. and its wholly-owned subsidiaries,
Thinspace UK and Thinspace USA. All material inter-company accounts and transactions have been eliminated.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those estimates.
ACCOUNTS
RECEIVABLE
Accounts
receivable are reported at the customers' outstanding balances less any allowance for doubtful accounts. Interest is not accrued
on overdue accounts receivable. The Company evaluates receivables on a regular basis for potential reserve. The accounts
receivable balances of $319,853 and $387,279 as of September 30, 2014 and December 31, 2013, respectively, do not include an allowance
for doubtful accounts as the Company anticipates payment on all accounts within the next fiscal year. The Company routinely evaluates
accounts receivable for uncollectible amounts.
REVENUE
RECOGNITION
Certain
volume licensing arrangements include a perpetual license for current products combined with rights to receive unspecified future
versions of software products, which the Company has determined are additional software products and are therefore accounted for
as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the coverage period. Arrangements
that include term based licenses for current products with the right to use unspecified future versions of the software during
the coverage period are also accounted for as subscriptions, with revenue recognized ratably over the coverage period.
Revenue
from cloud-based services arrangements that allow for the use of a hosted software product or service over a contractually determined
period of time without taking possession of software are accounted for as subscriptions with billings recorded as unearned revenue
and recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers.
Some
volume licensing arrangements include time-based subscriptions for cloud-based services and software offerings that are accounted
for as subscriptions. These arrangements are considered multiple element arrangements. However, because all elements are accounted
for as subscriptions and have the same coverage period and delivery pattern, they have the same revenue recognition timing.
DEFERRED
REVENUE
Deferred
revenue related to support and maintenance is recorded in a manner consistent with the Company’s revenue recognition policy.
The Company typically enters into one-year upgrade and maintenance contracts with its customers. The upgrade and maintenance contracts
are generally paid in advance but can be billed monthly or quarterly. The Company defers such payment and recognizes revenue ratably
over the contract period.
INVENTORY
The
Company values its inventory at the lower of cost (first-in, first-out) or market. The Company uses estimates and judgments regarding
the valuation of inventory to properly value inventory. Inventory adjustments are made for the difference between the cost of
the inventory and the estimated realizable value and charged to cost of goods sold in the period in which the facts that give
rise to the adjustments become known.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Our
short-term financial instruments, including cash, accounts receivable and accounts payable and accrued expenses consist primarily
of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate
their book value. The fair value of our notes and advances payable is based on management estimates and reasonably approximates
their book value based on their terms.
Fair
value measurements
ASC
820 “Fair Value Measurements and Disclosure” establishes a framework for measuring fair value and expands disclosure
about fair value measurements.
ASC
820 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes the following three levels of
inputs that may be used:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
In
accordance with ASC 820, the following table represents the Company's fair value hierarchy for its financial assets and (liabilities)
measured at fair value on a recurring basis as of September 30, 2014:
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Liabilities | |
| | |
| | |
| | |
| |
Conversion and warrant derivative liabilities | |
| - | | |
| - | | |
$ | 31,240,660 | | |
$ | 31,240,660 | |
Total Liabilities | |
$ | - | | |
$ | - | | |
$ | 31,240,660 | | |
$ | 31,240,660 | |
The
table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (conversion
and warrant derivative liabilities) for the nine month period ended September 30, 2014.
| |
2014 | |
Balance at beginning of year | |
$ | 11,268,087 | |
Additions to derivative instruments | |
| 7,766,042 | |
Change in fair value of derivative liabilities | |
| 15,447,215 | |
Reclassification upon expiration of warrants | |
| (1,892,000 | ) |
Reclassification upon conversion of debt | |
| (1,348,684 | ) |
Balance at end of period | |
$ | 31,240,660 | |
The
following is a description of the valuation methodologies used for these items:
Conversion
derivative liability — these instruments consist of certain of our notes, which are convertible based on a discount
to the market value of our common stock. These instruments were valued using pricing models, which incorporate the Company’s
stock price, volatility, U.S. risk free rate, dividend rate and estimated life.
CONCENTRATIONS
OF CREDIT RISK
The
Company performs ongoing credit evaluations of its customers. At September 30, 2014, one customer accounted for 10% of accounts
receivable.
The
Company maintains cash and cash equivalents with major financial institutions. Cash held in US bank accounts is insured up to
$250,000 at each institution. Cash held in UK bank accounts is insured up to £85,000 at September 30, 2014 (approximately
$138,000 at September 30, 2014) at each institution for each entity. At times, cash balances may exceed the insured
limits. The Company has not experienced any loss on these accounts. The balances are maintained in demand accounts
to minimize risk.
LOSS
PER SHARE
We
use ASC 260, “Earnings Per Share” for calculating the basic and diluted income (loss) per share. We compute basic
income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders by the weighted
average number of common shares outstanding.
Dilutive
common stock equivalents consist of shares issuable upon conversion of debt and preferred stock and the exercise of our stock
warrants. There were 270,375,324 common share equivalents at September 30, 2014 and none at September 30, 2013, which have been
excluded from the computation of the weighted average diluted shares.
Dilutive
common stock equivalents consist of shares issuable upon conversion of debt and preferred stock and the exercise of our stock
warrants and options. In accordance with ASC 260-45-20, common stock equivalents derived from shares issuable through the
exercise of our debt and warrants subject to derivative accounting are not considered in the calculation of the weighted average
number of common shares outstanding because the adjustments in computing income available to common stockholders would result
in a loss. Accordingly, the diluted EPS would be computed in the same manner as basic earnings per share.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
Recent
accounting pronouncements issued by the FASB and the SEC did not, or are not believed by management to have a material impact
on the Company's present or future consolidated financial statements.
NOTE
3 – CONVERTIBLE NOTES PAYABLE
IBC
Funds February 21, 2014 Financing
On
February 21, 2014, the Company entered into a Securities Purchase Agreement with IBC Funds, LLC (“IBC Funds”) pursuant
to which the Company sold to IBC Funds an 8% convertible debenture in the principal amount of $150,000. The debenture matures
on the third anniversary of the date of issuance and bears interest at a rate of 8% per annum, payable semi-annually and
on the maturity date. IBC Funds may convert, at any time, the outstanding principal and accrued interest on the debenture into
shares of the Company’s common stock, at a conversion per share at 25% of the lowest closing bid price for the
Company’s common stock during the previous 20 trading days.
IBC
Funds March 21, 2014 Financing
On
March 21, 2014, the Company entered into a Securities Purchase Agreement with IBC Funds pursuant to which the Company sold to
IBC Funds an 8% convertible debenture in the principal amount of $50,000. The debenture matures on the third anniversary
of the date of issuance and has terms substantially the same as the February 21, 2014 debenture.
Greystone
March 21, 2014 Financing
On
March 21, 2014, the Company entered into a Securities Purchase Agreement with Greystone Capital Partners, Inc. (“Greystone”) pursuant
to which the Company sold to Greystone an 8% convertible debenture in the principal amount of $50,000.The debenture
matures on the third anniversary of the date of issuance and has terms substantially the same as the February 21, 2014 debenture.
Greystone
March 26, 2014 Financing
On
March 26, 2014, the Company entered into a Securities Purchase Agreement with Greystone pursuant to which the Company sold to
Greystone an 8% convertible debenture in the principal amount of $50,000. The debenture matures on the third anniversary
of the date of issuance and has terms substantially the same as the February 21, 2014 note.
Greystone
April 17, 2014 Financing
On
April 17, 2014, the Company entered into a Securities Purchase Agreement with Greystone pursuant to which the Company sold to
Greystone an 8% convertible debenture in the principal amount of $65,000. The debenture matures on the third anniversary
of the date of issuance and bears interest a rate of 8% per annum, payable semi-annually and on the maturity date. Greystone
may convert, at any time, the outstanding principal and accrued interest on the Debenture into shares of the Company’s common
stock, at a conversion price per share at 40% of the lowest closing bid price for the Company’s common stock during
the previous 20 trading days. The conversion price is subject to adjustment in the event of sales by the Company of common stock
or securities convertible into common stock at a price per share lower than the then-effective conversion price, to such lower
price, subject to certain exceptions.
IBC
Funds April 17, 2014 Financing
On
April 17, 2014, the Company entered into a Securities Purchase Agreement with IBC Funds pursuant to which the Company sold to
IBC Funds an 8% convertible debenture in the principal amount of $100,000. The debenture matures on the third anniversary
of the date of issuance and has terms substantially the same as the Greystone April 17, 2014 note.
Greystone
May 29, 2014 Financing
On
May 29, 2014, the Company entered into a Securities Purchase Agreement with Greystone pursuant to which the Company sold to Greystone an
8% convertible debenture in the principal amount of up to $617,500. The debenture matures on the third anniversary of the date
of issuance and has terms substantially the same as the Greystone April 17, 2014 note. We have received $56,000 pursuant to this
debenture.
IBC
Funds May 29, 2014 Financing
On
May 29, 2014, the Company entered into a Securities Purchase Agreement with IBC Funds pursuant to which the Company sold to IBC Funds
an 8% convertible debenture in the principal amount of up to $617,500. The debenture matures on the third anniversary of the date
of issuance and has terms substantially the same as the Greystone April 17, 2014 note. We have received a total of $200,000 pursuant
to this note, $100,000 in May and $100,000 in September.
CP
US May 29, 2014 Financing
On
May 29, 2014, the Company entered into a Securities Purchase Agreement with CP US Income Group LLC (“CP US”) pursuant
to which the Company sold to CP US an 8% convertible debenture in the principal amount of $265,000. The debenture matures
on the third anniversary of the date of issuance and has terms substantially the same as Greystone April 17, 2014 note.
IBC
Funds August 29, 2014 Financing
On
August 29, 2014, the Company sold to IBC Funds a 10% promissory note in the principal amount of $130,000. On September 30,
2014, the Company issued an 8% convertible debenture in exchange for the promissory note. The debenture matures on September 30,
2015 and has terms substantially the same as the Greystone April 17, 2014 note.
The
conversion features of the debentures described above contain a variable conversion rate. As a result, we have classified the
conversion features as derivative liabilities in the financial statements. Upon issuance, we have recorded conversion feature
liabilities of $5,959,048. The value of the conversion feature liabilities was determined using the Black-Scholes method based
on the following assumptions: (1) risk free interest rates of between 0.6875 - 0.875%; (2) dividend
yield of 0%; (3) volatility factor of the expected market price of our common stock of between 389% - 419%; and (4) expected
lives of 1 - 3 years. The Company has allocated $1,116,000 to debt discount, to be amortized over the life of the debt, with the
balance of $4,843,048 being charged to expense at issue.
During
the nine months ended September 30, 2014, $233,244 of principal and $11,409 of accrued interest was converted into 6,451,870 shares
of common stock. The Company has recorded expense of $167,703 and $370,646 for the three months and nine months ended September
30, 2014, respectively, related to the change in fair value of the conversion feature through the dates of conversion.
NOTE
4 – DERIVATIVE LIABILITIES
The
Company has identified certain embedded derivatives related to its convertible debentures, convertible preferred stock, common
stock purchase warrants and a debt purchase agreement. Since certain of the debentures, the preferred stock and the debt
settlement agreement are convertible into a variable number of shares, the conversion features of those debentures are recorded
as derivative liabilities. Since the warrants have a price reset feature, they are recorded as derivative liabilities. The accounting
treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception
date and to adjust to fair value as of each subsequent balance sheet date.
Convertible
Debentures and Debt Settlement Agreement
At
September 30, 2014, we recalculated the fair value of the embedded conversion feature of our notes and debt settlement agreement
subject to derivative accounting and have determined that their fair value at September 30, 2014 was $23,519,781. The value of
the conversion liabilities was determined using the Black-Scholes method based on the following assumptions: (1) risk
free interest rate of 0.122 - 0.6875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price
of our common stock of between 200% - 210% and (4) an expected life of 1 - 2.66 years. We recorded expense of $11,711,200
and $10,045,269 during the three and nine months ended September 30, 2014, respectively, related to the change in fair value.
During
the nine months ended September 30, 2014 we recorded additions to our derivative conversion liabilities related to the conversion
feature attributable to interest accrued during the period. These additions aggregated $359,189 and $773,630 for the three and
nine months ended September 30, 2014, which has been charged to interest expense.
Convertible
Preferred Stock
The
conversion feature of our Series B preferred stock has been adjusted due to the subsequent issuance of debt. As a result, the
conversion price is now $0.05 per share or an aggregate of 1,500,000 shares of the Company’s common stock. The Company has
recorded income of $98 for the three months ended March 31, 2014, related to the change in fair value of the conversion feature
of the preferred stock through the date of adjustment. The Company has also recorded an expense of $74,977 for the three months
ended March 31, 2014 due to the increase in the fair value of the conversion feature as a result of the modification.
At
September 30, 2014, we recalculated the fair value of the embedded conversion feature of our Series B and Series C preferred stock
subject to derivative accounting and have determined that the fair value at September 30, 2014 was $7,031,986. The value of the
conversion liabilities was determined using the Black-Scholes method based on the following weighted average assumptions: (1) risk
free interest rate of 0.159%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our
common stock of 202% and (4) an expected life of 1.08 years. We recorded expense of $4,408,933 and $4,293,420 during
the three and nine months ended September 30, 2014, respectively, related to the change in fair value.
Warrant
Liabilities
The
warrants with price reset features have been adjusted due to the subsequent issuance of convertible debt. As a result, those warrants
totaled 8,700,000 with an exercise price of $0.05. The Company has recorded income of $21,915 for the three months ended March
31, 2014 related to the change in fair value of the warrants through the date of adjustment. The Company has also recorded an
expense of $958,388 for the three months ended March 31, 2014 due to the increase in the fair value of the warrants as a result
of the modifications.
During
the three months ended June 30, 2014 an aggregate of 4,700,000 warrants expired. The Company has recorded income of $1,258,643
for the nine months ended September 30, 2014 related to the change in fair value of the warrants through the dates of expiration.
At expiration the Company has reclassified an aggregate of $1,892,000 of derivative liability to equity.
At
September 30, 2014, we recalculated the fair value of the remaining warrants containing a price reset feature subject to derivative
accounting and have determined that the fair value at September 30, 2014 was $688,893. The value of the warrant liabilities was
determined using the Black-Scholes method based on the following weighted average assumptions: (1) risk free interest
rate of 0.01%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock
of 287% and (4) an expected life of 0.09 years. We recorded expense of $268,586 and $2,018,536 during the three and
nine months ended September 30, 2014, respectively, related to the change in fair value.
NOTE
5 – LOANS PAYABLE – RELATED PARTY
Entities
controlled by certain shareholders have provided short term working capital loans to the Company aggregating approximately $21,000
during the nine months ended September 30, 2014 which were settled in May 2014. The Company repaid approximately $119,000 of loans
during the nine months ended September 30, 2014.
During
May 2014 the Company settled all related party and related accrued interest through a lump sum payment. The excess of the liabilities
over the payment, totaling $17,391, has been credited to paid in capital.
NOTE
6 – RELATED PARTY TRANSACTIONS
An
entity owned by certain of our shareholders provided management services to the Company. Fees incurred for the three months ended
September 30, 2014 and 2013 were $0 and $81,288, respectively. Fees incurred for the nine months ended September 30, 2014 and
2013 were $0 and $233,470, respectively.
NOTE
7 – STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company is authorized to issue 50,000,000 shares of preferred stock, with par value of $0.001 per share, of which 75,000 shares
have been designated as Series B 10% Convertible preferred stock, and 672,000 shares have been designated as Series C Convertible
preferred stock. There were 75,000 Series B shares and 672,000 Series C shares issued and outstanding as of September 30, 2014
and December 31, 2013.
Common
Stock
The
Company is authorized to issue 500,000,000 shares of common stock, with par value of $0.001 per share. As of September 30, 2014
and December 31, 2013, there were 96,883,942 and 82,819,694 shares of common stock issued and outstanding, respectively.
During
January 2014 we issued 5,000,000 shares of common stock, valued at $1,250,000, pursuant to a consulting agreement with a one year
term. We will expense the value of the shares over 2014. During the three and nine months ended September 30, 2014, we recorded
expense of $312,500 and $937,500, respectively.
During
January 2014 we cancelled 250,000 shares of common stock which had been issued in July of 2012 as payment for consulting services,
pursuant to the request of the consultant.
During
the nine months ended September 30, 2014, we issued 6,451,870 shares of common stock upon the conversion of $233,244 of note principal
and $11,409 of accrued interest.
Effective
April 15, 2014 and April 30, 2014 we issued an aggregate of 277,354 shares of common stock to our former President as payment
of accrued salary in the amount of $30,000. Such shares were issued pursuant to terms contained in his employment agreement. The
shares had a value of $76,891.
During
the nine months ended September 30, 2014 we issued an aggregate of 2,360,024 shares of common stock, valued at $475,603, for services.
During
the nine months ended September 30, 2014 we issued 25,000 shares of common stock, valued at $20,500, as payment for a domain name.
During
the nine months ended September 30, 2014 we issued a stock grant to an employee in the amount of 200,000 shares of common stock,
valued at $34,000. The grant vests upon the two year anniversary, on May 29, 2016. The expense will be recorded over that two
year period. We have recorded an expense of $4,250 and $5,667 for the three and nine month periods ended September 30, 2014, respectively.
Options
Outstanding
During
May 2014 we granted an aggregate of 5,000,000 common stock options to an employee. The options will vest ratably over three
years commencing on the grant date and vesting on each one year anniversary, 1,000,000 on May 29, 2015 and 2,000,000 on May 29,
2016 and 2017. The options have an exercise price of $0.17 per share and a term of five years. These options have a weighted average
grant date fair value of $0.15 per option, determined using the Black-Scholes method based on the following weighted average assumptions:
(1) risk free interest rate of 0.52%; (2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 293%; and (4) an expected life of the options of 2.2 years. We have recorded an expense
for the employee options of $97,856 and $130,479 for the three and nine months ended September 30, 2014.
Warrants
Outstanding
At
September 30, 2014 we have an aggregate of 4,000,000 common stock purchase warrants outstanding and exercisable. The warrants
currently have an exercise price of $0.05 per share. The warrants expire on October 6, 2014 and November 10, 2014 and have a weighted
average remaining life of 0.09 years at September 30, 2014. The warrants contain a price-reset feature and are accounted for as
derivative liabilities.
NOTE
8 – COMMITMENTS AND CONTINGENCIES
LEASE
We
currently occupy office space pursuant to various short term leases expiring in 2014.
Rent
expense for the three months ended September 30, 2014 and 2013 was $26,178 and $57,886, respectively. Rent expense for the nine
months ended September 30, 2014 and 2013 was $88,604 and $123,444, respectively.
LITIGATION
From
time to time, The Company and its subsidiaries may become involved in various lawsuits and legal proceedings, which arise in the
ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm our business. The Company and its subsidiaries are currently not aware
of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse effect
on our business, financial condition or operating results.
NOTE
9 – SUBSEQUENT EVENTS
Common
Shares Issued
During
November 2014, we issued 14,594 shares of common stock, valued at $2,189, for services.
During
November 2014, we issued 2,500,000 shares of common stock upon the conversion of notes payable in the amount of $78,125.
IBC
Holdings Secured Notes
On
October 8, 2014, we entered into and closed a note purchase agreement (the “Firmware NPA”) with IBC Equity Holdings,
Inc. (“IBC Holdings”), pursuant to which the Company sold to IBC Holdings a secured promissory note (the “Firmware
Note”) in the principal amount of $300,000, for a purchase price of $300,000. IBC Holdings is an existing shareholder of
and lender to the Company. The Firmware Note matures on October 8, 2015 and does not bear interest.
Pursuant
to the Firmware NPA, the Company agreed to pay to IBC Holdings, commencing on October 8, 2014 and continuing in perpetuity thereafter,
a variable per unit amount with respect to the sale of individual hardware devices (“Revenue Sharing Units”) containing
our proprietary persistent memory, program code and resident data thereon which together provide the control program for the Company’s
hardware devices (the “Firmware”). The Company also granted to IBC Holdings, for a period commencing October 8, 2014
until the Firmware Note is no longer outstanding, an option to purchase the Firmware for a purchase price of $1 (the “Firmware
Purchase Option”). Any exercise by IBC Holdings of the Firmware Purchase Option will act as repayment of the Firmware Note.
Pursuant
to a security agreement entered into between the Company and IBC Holdings (the “Firmware Security Agreement”), the
Company’s obligations under the Firmware NPA and the Firmware Note are secured by a security interest in the Firmware.
On
October 8, 2014, the Company entered into and closed an additional note purchase agreement (the “VAR NPA”) with IBC
Holdings, pursuant to which the Company sold to IBC Holdings a secured promissory note (the “VAR Note”) in the principal
amount of $100,000, for a purchase price of $100,000. The VAR Note matures on October 8, 2015 and does not bear interest.
Pursuant
to the VAR NPA, the Company agreed to pay to IBC Holdings, commencing on October 8, 2014 and continuing in perpetuity thereafter,
20% of the gross margin proceeds of the sales of third party products (the “VAR Business”). The Company also granted
to IBC Holdings, for a period commencing October 8, 2014 until the VAR Note is no longer outstanding, an option to purchase the
assets used in the VAR Business for a purchase price of $1 (the “VAR Purchase Option”). Any exercise by IBC Holdings
of the VAR Purchase Option will act as repayment of the VAR Note.
Pursuant
to a security agreement entered into between the Company and IBC Holdings (the “VAR Security Agreement”), the Company’s
obligations under the VAR NPA and the VAR Note are secured by a security interest in the Company’s assets used in the VAR
Business.
Pursuant
to a rider to the Firmware Security Agreement and the VAR Security Agreement (the “Security Agreement Rider”), any
UCC-1 financing statements filed pursuant to the Firmware Security Agreement or VAR Security Agreement will be terminated at such
time as the payments made to IBC pursuant to the above agreements aggregate $1,000,000.
The
foregoing descriptions of the Firmware NPA, Firmware Note, Firmware Security Agreement, VAR NPA, VAR Note, VAR Security Agreement,
and Security Agreement Rider are summaries of the documents which have been filed as exhibits to a Current Report on Form 8-K
filed with the SEC on October 15, 2014.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Thinspace
Technology, Inc. (the “Company”, “Thinspace”, “we”, “us”, or “our”)
is a cloud computing company that develops software productivity solutions that allow its customers secure access to centrally
managed desktop or software applications and to work and collaborate from anywhere, accessing enterprise apps and data on
any of the latest devices, as easily as they would in their own office- simply and securely.
Thinspace
Technology cloud computing solutions help IT and service providers build both private and public clouds, leveraging virtualization
and networking technologies to deliver high-performance, elastic and cost-effective services for mobile workstyles.
Thinspace
Technology products have been designed to suit the needs of all sizes of organizations from 5 to 50,000+ users. Customers have
found our products to be easier to use, faster to implement and cheaper to maintain than other similar software, which is important
to small and medium sized companies or governmental offices as well as large enterprise organizations that are looking to reduce
their IT infrastructure costs. We market and license our products directly to systems integrators, or SIs, in addition to indirectly
through value-added resellers, or VARs, value-added distributors, or VADs, and original equipment manufacturers, or OEMs.
Thinspace
Technology Limited (formerly known as Propalms Ltd), our wholly-owned subsidiary which we acquired on December 31, 2013 (“Thinspace
UK”) is a United Kingdom corporation founded on October 11, 2001 and launched sales in July 2005.
Thinspace
Technology Ltd. (formerly known as Propalms International Ltd) (“Thinspace US”) is a Nevada corporation founded on
August 24, 2010 and is a wholly-owned subsidiary of Thinspace UK.
Critical
Accounting Policies
The
preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires
us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of
contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions
we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations
and assumptions. While there are a number of significant accounting policies affecting our financial statements; we believe the
following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
Use
of Estimates - These financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America and, accordingly, require management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period.
Going
Concern - The financial statements have been prepared on a going concern basis, and do not reflect any adjustments related
to the uncertainty surrounding our recurring losses or accumulated deficit
Revenue
Recognition - We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 605 “Revenue Recognition”. Revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred and title has transferred or services have been rendered, the price is fixed and
determinable and collectability is reasonably assured. Revenue is not recognized on product sales transacted on a test or pilot
basis. Instead, receipts from these types of transactions offset marketing expenses.
Fair
Value of Financial Instruments - Our short-term financial instruments, including cash, accounts payable and other
liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on
management’s estimates, reasonably approximate their book value. The fair value of the Company’s derivative
instruments is determined using option pricing models.
Results
of Operations
Three
Months ended September 30, 2014 as compared to the Three Months ended September 30, 2013
Revenues:
Revenue
was $2,322,170 for the three months ended September 30, 2014 compared to revenue of $411,606 for the three months ended September
30, 2013. Overall, our revenues increased 464% for the 2014 period as compared to the 2013 period. The increase is primarily attributable
to the delivery of a large order during the 2014 period (representing approximately 76% of revenue) as well as the introduction
of new products and the results of increased marketing activities.
Cost
of goods sold
Cost
of goods sold as a percent of revenue was 64% and 52% for the three months ended September 30, 2014 and 2013, respectively. Cost
of goods sold consists of software development, purchased hardware and software costs and shipping costs. Cost of goods sold as
a percentage of revenue varies based on the various costs incurred, relative to the timing of the recognition of revenue.
Operating
expense:
Operating
expense increased 132% for the three months ended September 30, 2014, to $1,507,661, compared to $650,540 for the three months
ended September 30, 2013. Our costs have increased as we have initiated the Thinspace US operations and increased our marketing
and other activities. Included in our operating expenses for the third quarter of 2014 is $312,500 of non-cash expense for stock-based
compensation related to costs associated with consultants we have engaged to assist our company in its growth efforts. This non-cash
expense is being amortized over the one year life of the contract, which runs through December 31, 2014. The balance of our other
operating expenses includes salaries, consulting, marketing and general overhead expenses (including approximately $109,000 in
other stock-based compensation for the 2014 period).
We
expect that our operating expenses will increase as our business grows and we devote additional resources towards promoting that
growth, most notably reflected in anticipated increases in salaries for sales personnel and technical resources.
Other
income (expense):
We
had expense from the change in the fair value of our derivative liabilities of $16,556,422 during the three months ended September
30, 2014 with no comparable income or expense for the three months ended September 30, 2013. The change in the fair value of our
derivative liabilities resulted primarily from the changes in our stock price and the volatility of our common stock during the
reported periods. Refer to Note 4 to the financial statements for further discussion of our derivative liabilities.
We
reported gain from the conversion of debt of $20,979 during the three months ended September 30, 2014, with no comparable item
for the three months ended September 30, 2013. The gain on debt conversion resulted from the issuance of shares of common stock
to pay off debt, based on the fair value of the shares issued as compared to the carrying value of the related debt. The closing
price on the date of conversion is used to compute the actual fair market value of our common stock in determining the amount
of the gain or loss.
We
reported interest expense of $1,883,300 during the three months ended September 30, 2014 as compared with interest expense of
$67 during the three months ended September 30, 2013. Interest expense during the 2014 period consists primarily of derivative
liabilities issued during the period whose fair values exceeded the proceeds of the debt, aggregating $1,709,794. The balance
of the expense for the 2014 period relates to the amortization of debt discount and interest accrued on debt.
Nine
Months ended September 30, 2014 as compared to the Nine Months ended September 30, 2013
Revenues:
Revenue
was $5,700,775 for the nine months ended September 30, 2014 compared to revenue of $984,135 for the nine months ended September
30, 2013. Overall, our revenues increased 479% for the 2014 period as compared to the 2013 period. The increase is primarily attributable
to the delivery of a large order during the 2014 period (representing approximately 67% of revenue) as well as the introduction
of new products and the results of increased marketing activities.
Cost of goods sold
Cost
of goods sold as a percent of revenue was 58% and 59% for the nine months ended September 30, 2014 and 2013, respectively. Cost
of goods sold consists of software development, purchased hardware and software costs and shipping costs. Cost of goods sold as
a percentage of revenue varies based on the various costs incurred, relative to the timing of the recognition of revenue.
Operating
expense:
Operating
expense increased 263% for the nine months ended September 30, 2014, to $4,796,831, compared to $1,321,265 for the nine months
ended September 30, 2013. Our costs have increased as we have initiated the Thinspace US operations and increased our marketing
and other activities. Included in our operating expenses for the first nine months of 2014 is $937,500 of non-cash expense for
stock- based compensation related to costs associated with consultants we have engaged to assist our company in its growth efforts.
This non-cash expense is being amortized over the one year life of the contract, which runs through December 31, 2014. The balance
of our other operating expenses includes salaries, consulting, marketing and general overhead expenses (including approximately
$670,000 in other stock-based compensation for the 2014 period).
We
expect that our operating expenses will increase as our business grows and we devote additional resources towards promoting that
growth, most notably reflected in anticipated increases in salaries for sales personnel and technical resources.
Other
income (expense):
We
had expense from the change in the fair value of our derivative liabilities of $15,447,215 during the nine months ended September
30, 2014 with no comparable income or expense for the nine months ended September 30, 2013. The change in the fair value of our
derivative liabilities resulted primarily from the changes in our stock price and the volatility of our common stock during the
reported periods. Refer to Note 4 to the financial statements for further discussion of our derivative liabilities.
We
reported gain from the conversion of debt of $176,108 during the nine months ended September 30, 2014, with no comparable item
for the nine months ended September 30, 2013. The gain on debt conversion resulted from the issuance of shares of common stock
to pay off debt, based on the fair value of the shares issued as compared to the carrying value of the related debt. The closing
price on the date of conversion is used to compute the actual fair market value of our common stock in determining the amount
of the gain or loss.
We
reported interest expense of $7,354,199 during the nine months ended September 30, 2014 as compared with interest income of $116
during the nine months ended September 30, 2013. Interest expense during the 2014 period consists primarily of derivative liabilities
issued during the period whose fair values exceeded the proceeds of the debt, aggregating $5,616,678, and the expense associated
with the price resets of certain of our derivative instruments, aggregating $1,033,365. The balance of the expense for the 2014
period relates to the amortization of debt discount and interest accrued on debt.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of September 30, 2014 we had approximately
$82,000 in cash and cash equivalents and a working capital deficit of $33,421,537 (resulting primarily from derivative liabilities
aggregating $31,240,660), as compared to cash and cash equivalents of approximately $341,000 and a working capital deficit of
$13,312,285 at December 31, 2013. Our recent sources of operating capital have been equity and debt financings, along with advances
from related parties. In December 2013 we raised $100,000 from the sale of a convertible debenture and $672,000 from the sale
of preferred stock (of which $472,000 was received in January 2014). We also received proceeds from convertible and other notes
aggregating $1,191,000 during the nine months ended September 30, 2014.
Net
Cash Provided by Operating Activities
We
used $1,716,990 of cash in our operating activities during the nine months ended September 30, 2014 compared to $73,237 provided
by our operating activities for the nine months ended September 30, 2013. The increase in net cash used results primarily from
an increase in net loss of $431,249 (after adjusting for non-cash expenses), an increase in inventory and prepayments and decreases
in deferred revenue and accounts payable.
Net
Cash Used in Investing Activities
We
used $18,421 for the purchase of furniture and equipment during the nine months ended September 30, 2014, compared to $47,187
used during the nine months ended September 30, 2013.
Net
Cash Provided by Financing Activities
During
the nine months ended September 30, 2014, we received $472,000 from the sale of our preferred stock, $1,191,000 from the sale
of notes and convertible debentures and $21,000 from stockholder advances. We repaid $86,583 of notes payable and repaid $118,670
of shareholder advances. During the nine months ended September 30, 2013 we made note repayments of $11,305 and received advances
from related parties of $42,518.
IBC
Funds $130,000 Financing
On
August 29, 2014, the Company sold to IBC Funds, LLC (“IBC Funds”) a 10% promissory note in the principal amount
of $130,000. On September 30, 2014 the Company issued an 8% convertible debenture in exchange for the promissory note. The debenture
matures on the first anniversary of the date of issuance and bears an interest rate of 8% per annum, payable semi-annually and
on the maturity date. IBC Funds may convert, at any time, the outstanding principal and accrued interest on the debenture into
shares of the Company’s common stock, at a conversion price per share at price per share of 40% of the lowest closing bid
price for the Company’s common stock during the previous 20 trading days. The conversion price is subject to adjustment
in the event of sales by the Company of common stock or securities convertible into common stock at a price per share lower than
the then-effective conversion price, to such lower price, subject to certain exceptions.
We
presently do not have any other available credit, bank financing or other external sources of liquidity. We will need additional
capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being
sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance
of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common
stock and a downturn in the equity and debt markets could make it more difficult to obtain financing through the issuance of equity
or debt securities. Even if we are able to raise the funds required, we may incur unexpected costs and expenses, fail to collect
significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing.
Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing
is not available or is not available on acceptable terms, we will have to curtail our operations.
Off-Balance
Sheet Arrangements
We
have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained
interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities
or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market
risk or credit risk support.
Item
3. Quantitative and Qualitative Disclosures About Market Risk .
Not required
for a smaller reporting company.
Item
4. Controls and Procedures.
Disclosure
controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's
(the “SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated
and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.
As
of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation
of our President and Chief Executive Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Exchange Act). Based upon this evaluation, our President and Chief Executive Officer concluded that, due to the
material weaknesses in our internal controls over financial reporting disclosed in the Company’s 10-K for the year ended
December 31, 2013, the Company’s disclosure controls and procedures are not effective to ensure that information required
to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms and also are not effective in ensuring that
information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the Company’s management, including the Company’s President and Chief Executive Officer to allow
timely decisions regarding required disclosure.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended September 30, 2014 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
We are not
party to any material legal proceedings and no property of the Company is subject to any material legal proceedings.
Item
1A. Risk Factors.
Not required
for a smaller reporting company.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
During
the three months ended September 30, 2014, we issued 2,400,000 shares of common stock upon the conversion of $42,060 of note principal.
During
September 2014 we issued an aggregate of 60,024 shares of common stock for services.
On
August 29, 2014, the Company sold to IBC Funds a 10% promissory note in the principal amount of $130,000. On September 30,
2014 the Company issued an 8% convertible debenture in exchange for the promissory note. IBC Funds may convert, at any time, the
outstanding principal and accrued interest on the debenture into shares of the Company’s common stock, at a conversion price
per share at price per share of 40% of the lowest closing bid price for the Company’s common stock during the previous 20
trading days.
In
connection with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities
Act of 1933, as amended, for transactions not involving a public offering.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Mine Safety Disclosures.
Not applicable.
Item
5. Other Information.
None.
Item 6. Exhibits.
No. |
|
Description |
31.1 |
|
Rule
13a-14(a)/ 15d-14(a) Certification of Principal Executive and Financial Officer |
32.1 |
|
Section
1350 Certification of Principal Executive and Financial Officer |
EX-101.INS |
|
XBRL
INSTANCE DOCUMENT |
EX-101.SCH |
|
XBRL
TAXONOMY EXTENSION SCHEMA DOCUMENT |
EX-101.CAL |
|
XBRL
TAXONOMY EXTENSION CALCULATION LINKBASE |
EX-101.LAB |
|
XBRL
TAXONOMY EXTENSION LABELS LINKBASE |
EX-101.PRE |
|
XBRL
TAXONOMY EXTENSION PRESENTATION LINKBASE |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
Thinspace
Technology, Inc. |
|
|
|
Date:
November 14, 2014 |
By: |
/s/
Jay Christopher Bautista |
|
Jay
Christopher Bautista |
|
Chief
Executive Officer
(principal executive, financial and accounting officer) |
21
Exhibit
31.1
Certifications
I, Jay Christopher
Bautista, certify that:
1. |
I
have reviewed this quarterly report on Form 10-Q of Thinspace Technology, Inc.; |
|
|
2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
The
registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
(b) |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
(c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
|
|
|
|
(d) |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
5. |
The
registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
|
(a) |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
|
|
|
(b) |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: November
14, 2014
|
|
/s/
Jay Christopher Bautista |
|
Jay
Christopher Bautista |
|
Chief
Executive Officer
(principal
executive and financial officer) |
|
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Thinspace Technology, Inc. (the “Company”) on Form 10-Q for the period ended
September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jay
Christopher Bautista, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant
to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Dated: November
14, 2014
/s/
Jay Christopher Bautista |
|
Jay
Christopher Bautista |
|
Chief
Executive Officer
(principal
executive and financial officer) |
|