Document_and_Entity_Informatio
Document and Entity Information | 9 Months Ended | |
Sep. 30, 2014 | Nov. 19, 2014 | |
Document And Entity Information | ' | ' |
Entity Registrant Name | 'BALQON CORP. | ' |
Entity Central Index Key | '0001169440 | ' |
Document Type | '10-Q | ' |
Document Period End Date | 30-Sep-14 | ' |
Amendment Flag | 'false | ' |
Current Fiscal Year End Date | '--12-31 | ' |
Is Entity a Well-known Seasoned Issuer? | 'No | ' |
Is Entity a Voluntary Filer? | 'No | ' |
Is Entity's Reporting Status Current? | 'Yes | ' |
Entity Filer Category | 'Smaller Reporting Company | ' |
Entity Common Stock, Shares Outstanding | ' | 36,891,530 |
Document Fiscal Period Focus | 'Q3 | ' |
Document Fiscal Year Focus | '2014 | ' |
CONDENSED_BALANCE_SHEETS_Unaud
CONDENSED BALANCE SHEETS (Unaudited) (USD $) | Sep. 30, 2014 | Dec. 31, 2013 |
Current assets | ' | ' |
Cash and cash equivalents | $3,124 | $21,573 |
Accounts receivable, trade, net of allowance for doubtful accounts of $199,300 and $199,300, respectively | 109,190 | 74,825 |
Inventories | 118,877 | 276,202 |
Prepaid expenses | 19,476 | 110,763 |
Total current assets | 250,667 | 483,363 |
Property and equipment, net | 14,779 | 19,747 |
Other assets: | ' | ' |
Deposits | 14,400 | 14,400 |
Total assets | 279,846 | 517,510 |
Current liabilities | ' | ' |
Accounts payable and accrued expenses | 2,705,759 | 2,207,731 |
Accounts payable to related parties | 2,942,650 | 2,700,250 |
Customer deposits | 447,260 | 1,163,470 |
Payroll taxes payable | 402,823 | 351,191 |
Accrued expenses to officer | 979,000 | 804,467 |
Advances from shareholder | 5,018 | 5,018 |
Derivative liability | 790,542 | 1,076,792 |
Convertible notes - in default | 3,361,500 | 3,361,500 |
Total current liabilities | 11,634,552 | 11,670,419 |
SHAREHOLDERS' DEFICIENCY | ' | ' |
Common stock, $0.001 par value, 100,000,000 shares authorized, 36,891,530 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively | 36,891 | 36,891 |
Additional paid in capital | 19,982,383 | 19,982,383 |
Accumulated deficit | -31,373,980 | -31,172,183 |
Total shareholders' deficiency | -11,354,706 | -11,152,909 |
Total liabilities and shareholders' deficiency | $279,846 | $517,510 |
CONDENSED_BALANCE_SHEETS_Unaud1
CONDENSED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $) | Sep. 30, 2014 | Dec. 31, 2013 |
Current assets | ' | ' |
Accounts receivable, trade allowance | $199,300 | $199,300 |
Shareholders' Deficiency | ' | ' |
Common stock, par value | $0.00 | $0.00 |
Common stock, authorized | 100,000,000 | 100,000,000 |
Common stock, issued | 36,891,530 | 36,891,530 |
Common stock, outstanding | 36,891,530 | 36,891,530 |
CONDENSED_STATEMENTS_OF_OPERAT
CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (USD $) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2014 | Sep. 30, 2013 | Sep. 30, 2014 | Sep. 30, 2013 | |
Income Statement [Abstract] | ' | ' | ' | ' |
Revenues | $721,806 | $306,989 | $1,572,881 | $1,121,135 |
Cost of Revenues | 243,315 | 287,208 | 935,222 | 1,088,056 |
Gross Profit | 478,491 | 19,781 | 637,659 | 33,079 |
Operating Expenses | ' | ' | ' | ' |
General and administrative | 242,890 | 277,887 | 775,349 | 1,455,972 |
Research and development | 3,484 | 13,385 | 19,520 | 87,531 |
Depreciation and amortization | 1,218 | 3,543 | 4,968 | 10,824 |
Total operating expenses | 247,592 | 294,815 | 799,837 | 1,554,327 |
PROFIT (LOSS) FROM OPERATIONS | 230,899 | -275,034 | -162,178 | -1,521,248 |
Change in fair value of derivative liabilities | 787,996 | 337,039 | 286,250 | 79,000 |
Interest expense | -108,556 | -90,042 | -325,869 | -579,993 |
NET INCOME (LOSS) | $910,339 | ($28,037) | ($201,797) | ($2,022,241) |
Net loss per share - basic and diluted | $0.02 | $0 | ($0.01) | ($0.05) |
Weighted average shares outstanding, basic and diluted | 36,891,530 | 36,891,530 | 36,891,530 | 36,891,530 |
CONDENSED_STATEMENT_OF_SHAREHO
CONDENSED STATEMENT OF SHAREHOLDERS' DEFICIENCY (Unaudited) (USD $) | 3 Months Ended | 9 Months Ended |
Sep. 30, 2014 | Sep. 30, 2014 | |
Beginning Balance, Amount | ' | ($11,152,909) |
Net loss | 910,339 | -201,797 |
Ending Balance, Amount | -11,354,706 | -11,354,706 |
Common Stock | ' | ' |
Beginning Balance, Shares | ' | 36,891,530 |
Beginning Balance, Amount | ' | 36,891 |
Net loss | ' | 0 |
Ending Balance, Shares | 36,891,530 | 36,891,530 |
Ending Balance, Amount | 36,891 | 36,891 |
Additional Paid-In Capital | ' | ' |
Beginning Balance, Amount | ' | 19,982,383 |
Net loss | ' | 0 |
Ending Balance, Amount | 19,982,383 | 19,982,383 |
Accumulated Deficit | ' | ' |
Beginning Balance, Amount | ' | -31,172,183 |
Net loss | ' | -201,797 |
Ending Balance, Amount | ($31,373,980) | ($31,373,980) |
CONDENSED_STATEMENTS_OF_CASH_F
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (USD $) | 9 Months Ended | |
Sep. 30, 2014 | Sep. 30, 2013 | |
Cash flows from operating activities: | ' | ' |
Net loss | ($201,797) | ($2,022,241) |
Adjustments to reconcile net loss to net cash used in operating activities: | ' | ' |
Depreciation and amortization | 4,968 | 10,824 |
Fair value of common stock transferred by shareholder to settle Company debts | 0 | 323,176 |
Change in fair value of derivative liability | -286,250 | -79,000 |
Amortization of note discount | 0 | 280,654 |
Changes in operating assets and liabilities: | ' | ' |
Accounts receivable | -34,365 | -20,382 |
Inventories | 157,325 | -35,087 |
Prepaid expenses | 91,287 | 18,291 |
Payroll taxes payable | 51,632 | 29,864 |
Accounts payable and accrued expenses | 914,961 | 1,281,073 |
Customer deposits | -716,210 | 241,385 |
Net cash provided by (used in) operating activities | -18,449 | 28,557 |
Decrease in cash and cash equivalents | -18,449 | 28,557 |
Cash and cash equivalents, beginning of period | 21,573 | 33,869 |
Cash and cash equivalents, end of period | $3,124 | $62,426 |
1_NATURE_OF_BUSINESS_AND_SIGNI
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES | 9 Months Ended | |||||||||||||||||
Sep. 30, 2014 | ||||||||||||||||||
Accounting Policies [Abstract] | ' | |||||||||||||||||
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES | ' | |||||||||||||||||
The Company | ||||||||||||||||||
Balqon Corporation, a California corporation (“Balqon California”), was incorporated on April 21, 2005 and commenced business operations in 2006. On October 24, 2008, Balqon California completed a merger with BMR Solutions Inc., a Nevada corporation (“BMR”), with BMR being the survivor of the merger. Upon the closing, BMR changed its name to Balqon Corporation (the “Company”). The Company develops and manufactures complete drive systems and battery systems for electric vehicles, industrial equipment and renewable energy storage devices. The Company also designs and assembles electric powered yard tractors, short haul drayage tractors and inner city Class 7 and 8 delivery trucks utilizing its proprietary drive system technologies. | ||||||||||||||||||
Basis of Presentation of Unaudited Financial Information | ||||||||||||||||||
The unaudited financial statements of the Company for the three and nine months ended September 30, 2014 and 2013 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-K for scaled disclosures for smaller reporting companies. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the Company’s financial position and results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The balance sheet information as of December 31, 2013 was derived from the audited financial statements included in the Company’s financial statements as of and for the years ended December 31, 2013 and 2012 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 15, 2014. These financial statements should be read in conjunction with that report. | ||||||||||||||||||
Going Concern | ||||||||||||||||||
The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the nine months ended September 30, 2014, the Company utilized cash flow from operations of $18,449, and incurred a net loss of $201,797. As of September 30, 2014, the Company had and shareholders’ deficiency of $11,354,706. In addition, the Company has not paid $402,823 in payroll taxes and is delinquent in payment of $3,361,500 in principal of its convertible notes and $1,068,115 of interest due on convertible notes payable. Pursuant to the terms of the notes, the non-payment of principal and interest by the Company constitutes an event of default and, as a result, the holders of the notes may accelerate payment of all amounts outstanding under the notes by giving written notice to the Company and thereby requiring that the Company immediately pay all principal and accrued and unpaid interest. If the holders of the notes were to declare the notes due and payable, the Company presently does not have the ability to pay these notes. In addition, as of September 30, 2014, $2,006,500 of the notes are secured under the terms of a security agreement granting the holders of the notes a security interest in all of the Company’s assets (including all intellectual property assets of the Company) subject to the interests of the holders of senior indebtedness (as that term is defined in the notes). | ||||||||||||||||||
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and to ultimately achieve sustainable revenues and profitable operations. The Company’s independent auditors, in their report on our financial statements for the year ending December 31, 2013, expressed substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of these uncertainties. | ||||||||||||||||||
The Company does not currently have sufficient liquidity to meet its anticipated working capital, debt service and other liquidity needs in the very near-term. The Company believes that it has sufficient working capital to continue operations only through the next six month unless it successfully restructures its debt, experiences a significant improvement in sales and obtains other sources of liquidity. In addition, although various secured creditors holding approximately $2,006,500 in secured convertible notes and secured debentures have not exercised their rights to foreclose on all of the Company’s assets (including its intellectual property assets), no assurance can be given that these holders of secured debt will not exercise their remedies under the Company’s outstanding secured notes and secured debentures. | ||||||||||||||||||
The Company has been, and currently is, working towards identifying and obtaining new sources of financing. No assurances can be given that the Company will be successful in obtaining additional financing in the future. Any future financing that the Company may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that the Company is able to obtain will likely include financial and other covenants that will restrict the Company’s flexibility. At a minimum, the Company expects these covenants to include restrictions on its ability to pay dividends on its common stock. Any failure to comply with these covenants would have a material adverse effect on the Company’s business, prospects, financial condition, results of operations and cash flows. In addition, the Company’s senior secured convertible debentures issued between July and December 2010 contain covenants that include restrictions on the Company’s ability to pay dividends on its common stock. | ||||||||||||||||||
If adequate funds are not available, the Company may be required to delay, scale back or eliminate portions of its operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require the Company to relinquish rights to certain of its technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of the Company’s proprietary technology and other important assets and could also adversely affect its ability to fund the Company’s continued operations and its product and service development efforts. Although the Company is actively pursuing a number of alternatives, including seeking to restructure its debt and seeking to raise additional debt or equity financing, or both, there can be no assurance that the Company will be successful. | ||||||||||||||||||
Estimates | ||||||||||||||||||
The preparation of 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Material estimates relate to the recognition of contract revenues and estimated costs to complete, recoverability of reported amounts of long-lived assets, and assumptions made in valuing derivative instruments and equity instruments issued for compensation. Actual results may differ from those estimates. | ||||||||||||||||||
Revenues | ||||||||||||||||||
Sales of Production Units and Parts | ||||||||||||||||||
The Company recognizes revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of our product or delivery of the product to the destination specified by the customer. | ||||||||||||||||||
The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs when the Company places the products with the buyer’s carrier. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured. Except for warranties, the Company has no post-sales obligations. | ||||||||||||||||||
Inventories | ||||||||||||||||||
Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Recorded inventories at September 30, 2014 and December 31, 2013 do not include approximately $172,000 and $326,000 of batteries and other items held on consignment from Seven One Battery Company, an affiliate of the Company’s Chairman of the Board (See Note 5). Inventories consist of raw materials. | ||||||||||||||||||
Loss Per Share | ||||||||||||||||||
Basic loss per share has been computed using the weighted average number of common shares outstanding and issuable during the period. Diluted loss per share is computed based on the weighted average number of common shares and all common equivalent shares outstanding during the period in which they are dilutive. Common equivalent shares consist of shares issuable upon the exercise of stock options, warrants or other convertible securities such as convertible notes. For the nine months ended September 30, 2014 and 2013 and the three months ended September 30, 2013, common stock equivalent shares have been excluded from the calculation of loss per share as their effect is anti-dilutive. For the three months ended September 30, 2014, the effect of potentially dilutive securities is not reflected in diluted net income per share as the exercise prices of common stock equivalents were higher than the average fair market value of common shares during the reporting period. | ||||||||||||||||||
The following table summarizes the weighted average shares and common stock equivalents outstanding as of September 30, 2014 and 2013: | ||||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2014 | 2013 | |||||||||||||||||
Weighted average shares outstanding | 36,891,530 | 36,891,530 | ||||||||||||||||
Common stock equivalents: | ||||||||||||||||||
Warrants exercisable into common shares | 10,295,500 | 10,295,500 | ||||||||||||||||
Notes payable convertible into common shares | 6,814,583 | 6,814,583 | ||||||||||||||||
Total common stock equivalents | 17,110,083 | 17,110,083 | ||||||||||||||||
Financial Assets and Liabilities Measured at Fair Value | ||||||||||||||||||
The Company’s financial instruments include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses and accounts payable to related party. Management considers the carrying amounts to approximate their fair values due to their short-term nature. The Company also has outstanding convertible notes whose recorded value approximates its market value based upon the effective interest rates of the notes. The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the condensed balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets: | ||||||||||||||||||
Level 1 Quoted prices in active markets for identical assets or liabilities. | ||||||||||||||||||
Level 2 Inputs, other than the quoted prices in active markets, that is observable either directly or indirectly. | ||||||||||||||||||
Level 3 Unobservable inputs based on the Company’s assumptions. | ||||||||||||||||||
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2014 and December 31, 2013. | ||||||||||||||||||
30-Sep-14 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Fair value of Derivative Liability | $ | – | $ | – | $ | 790,542 | $ | 790,542 | ||||||||||
31-Dec-13 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Fair value of Derivative Liability | $ | – | $ | – | $ | 1,076,792 | $ | 1,076,792 | ||||||||||
Derivative Financial Instruments | ||||||||||||||||||
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The Company uses a probability weighted average Black-Scholes-Merton model to value the derivative instruments. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. | ||||||||||||||||||
Concentrations | ||||||||||||||||||
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and unsecured accounts receivable. | ||||||||||||||||||
The Company maintains cash balances at one bank. At times, the amount on deposit exceeds the federally insured limits. Management believes that the financial institution that holds the Company’s cash is financially sound and, accordingly, minimal credit risk exists. As of September 30, 2014 and September 30, 2013 the Company did not have any amount in excess of insured limits maintained at the bank. | ||||||||||||||||||
For the nine months ended September 30, 2014, 34% of total revenues were from one customer. For the three months ended September 30, 2014, 73% of total revenues were from one customer. For the nine months ended September 30, 2013, 29% of total revenues were from one customer. For the three months ended September 30, 2013, 57% of total revenues were from one customer. At September 30, 2014, a single customer represented 45% of total accounts receivable. Accounts receivable from a single customer represented 69% of total accounts receivable at December 31, 2013. | ||||||||||||||||||
For the nine months ended September 30, 2014, 45% of costs of revenue were to one vendor. For the nine months ended September 30, 2013 87% of the cost of revenue were to one vendor. For the three months ended September 30, 2014, 80% of costs of revenue were to one vendor. For the three months ended September 30, 2013, 86% of costs of revenue were to one vendor. | ||||||||||||||||||
At September 30, 2014, accounts payable to the largest vendor represented 57% of total accounts payable. The vendor is a related party. (See Note 5). At September 30, 2013, accounts payable to largest vendor represented 60% of total account payable balance. The vendor is a related party (see Note 5). | ||||||||||||||||||
Recent Accounting Pronouncements | ||||||||||||||||||
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting. | ||||||||||||||||||
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)." ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition. | ||||||||||||||||||
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 on the Company’s financial statement presentation and disclosures. | ||||||||||||||||||
Other accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements. |
2_CONVERTIBLE_PROMISSORY_NOTES
2. CONVERTIBLE PROMISSORY NOTES - IN DEFAULT | 9 Months Ended | ||||||||
Sep. 30, 2014 | |||||||||
Debt Disclosure [Abstract] | ' | ||||||||
CONVERTIBLE NOTES PAYABLE IN DEFAULT | ' | ||||||||
Convertible notes payable in default consist of the following as of September 30, 2014 and December 31, 2013: | |||||||||
September 30, | December 31, | ||||||||
2014 | 2013 | ||||||||
Subordinated secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (1) | $ | 891,500 | $ | 891,500 | |||||
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2012 (2) | 25,000 | 25,000 | |||||||
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due September 1, 2012 (3) | 1,330,000 | 1,330,000 | |||||||
Senior secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (4) | 775,000 | 775,000 | |||||||
Secured Convertible Note Payable, Interest at 10% per annum payable quarterly, due March 31, 2013 (5) | 340,000 | 340,000 | |||||||
Convertible notes payable | $ | 3,361,500 | $ | 3,361,500 | |||||
(1) In March 2009, the Company entered into agreements with 34 accredited investors for the sale by the Company of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,000,000 shares of the Company’s common stock at a conversion price of $1.00 per share of common stock, subject to adjustment. The notes are subordinated to the right to the prior payment of all Senior Indebtedness (as defined in the notes). Additionally, the Company issued three-year warrants to purchase an aggregate of 1,000,000 shares of the Company’s common stock at an exercise price of $1.50 per share. | |||||||||
During the three months ended March 31, 2012, the Company negotiated Amendment and Exchange Agreements with holders of its 10% unsecured notes payable that matured on March 31, 2012. The terms of the Amendment and Exchange Agreements provide that the maturity date of these notes (the “Amended Notes”) was extended until March 31, 2013, and are now currently in default. The Amended Notes continue to accrue quarterly interest at the rate of 10% and are subject to a security agreement. The Amendment and Exchange Agreements also provide that the Amended Notes are convertible into common stock of the Company at a price of $0.40 per share, subject to adjustment for a weighted average anti-dilution provision. In connection with the issuance of the Amended Notes, the Company issued three-year warrants to purchase up to 975,000 shares of common stock at an exercise price per share of $0.40. As of September 30, 2014 and December 31, 2013, $891,500 was outstanding under these notes. | |||||||||
The Amended Notes were due on March 31, 2013 (the “Maturity Date”) and are currently in default due to non-payment of the note by the Company. The Amended Notes are secured under the terms of a security agreement granting the holders of the Amended Notes a security interest in all of the Company’s personal property subject to the interests of the holders of Senior Indebtedness (as defined in the Amended Notes). The security interest granted is subordinate to existing bank financing and the 10% Senior Secured Convertible Debentures that currently have a principal balance due of $775,000. | |||||||||
Each of the agreements governing the Amended Notes and warrants includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the current conversion price of the Amended Notes or exercise price of the warrants issued with the Amended Notes. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion price of the Amended Notes and the exercise price of the warrants are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features and the warrants are not considered indexed to the Company’s own stock and characterized the initial fair value of these conversion features and warrants as derivative liabilities upon issuance. The fair value of these conversion features and warrants was considered a note discount at issuance and was amortized as interest expense over the life of the Note. During the three months ended March 31, 2013 the Company included in interest expense $207,357, relating to the amortization of this discount. As of September 30, 2014 and December 31, 2013, the note discount was fully amortized. | |||||||||
(2) A holder of $25,000 in principal of the Company’s 10% Unsecured Convertible Promissory Notes issued between March 25, 2009 and June 19, 2009 did not accept the Company’s offer under the Amendment and Exchange Agreements (see note 1 above) to exchange this note for an Amended Note that matured on March 31, 2013. As such, this 10% Unsecured Convertible Promissory Note matured on March 31, 2012 and is in default due to non-payment of the note by the Company. | |||||||||
(3) Between February 5, 2010 and April 12, 2010, the Company entered into agreements with seven accredited investors for the sale by the Company of an aggregate of $1,500,000 of 10% Unsecured Subordinated Convertible Promissory Notes which are convertible into an aggregate of 1,999,993 shares of the Company’s common stock at a conversion price of $0.75 per share of common stock, subject to adjustment. As of September 30, 2014 and December 31, 2013, $1,330,000 in principal was outstanding under these notes. The notes matured on September 1, 2012 and are presently in default due to non-payment. | |||||||||
The fair value of the conversion features and warrants was considered a note discount at issuance and was amortized as interest expense over the life of the Note. As of September 30, 2014 and December 31, 2013, the note discount was fully amortized. | |||||||||
(4) Between July 2010 and December 2010, the Company entered into agreements with 26 accredited investors for the sale by the Company of an aggregate of $850,000 of 10% Senior Secured Convertible Debentures (the “Debentures”) which are convertible into an aggregate of 1,133,333 shares of the Company’s common stock at a conversion price of $0.75 per share, subject to adjustment. In connection with this offering, the Company also issued to the investors warrants to purchase an aggregate of 850,000 shares of the Company’s common stock at an exercise price of $0.75 per share, subject to adjustment. The Company also issued to its placement agent warrants to purchase 68,000 shares of the Company’s common stock at exercise price of $0.75 per share, subject to the same adjustments and terms as those warrants issued to investors. Under the adjustment provisions of the Debentures and warrants, the conversion price of the Debentures and the exercise price of the warrants were reduced to $0.56 in connection with various dilutive issuances made in 2011 and 2010. | |||||||||
As of September 30, 2014 and December 31, 2013 $775,000 in principal was outstanding under these Debentures. The Debentures were due on September 30, 2012, and subsequently extended to, March 31, 2013 (the “Maturity Date”) and are now in default due to non-payment. The Debentures are secured under the terms of a security agreement granting the holders of the Debentures a security interest in all of the Company’s personal property. | |||||||||
Each of the agreements governing the Debentures and warrants includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current exercise price. As a result, the Company determined that the conversion features and the warrants are not considered indexed to the Company’s own stock and characterized the fair value of these warrants as derivative liabilities upon issuance. The fair value of the conversion features and warrants was considered a note discount at issuance and was amortized as interest expense over the life of the Note. As of September 30, 2014 and December 31, 2013, the note discount was fully amortized. | |||||||||
(5) On May 18, 2012, the Company entered into Agreements with 3 accredited investors for a sale by the Company of an aggregate of $340,000 10% Secured Subordinated Convertible Promissory Notes (the “May 2012 Notes”) which are convertible into an aggregate of 850,000 shares of the Company’s common stock at a conversion price of $0.40 per share of common stock, subject to adjustment. The notes were due on March 31, 2013 and are now in default due to non-payment. The May Notes are subordinated to the right to the prior payment of all Senior Indebtedness (as defined in the notes). The notes pay quarterly interest at the rate of 10% and are subject to a security agreement that secures the Notes by the Company’s assets. The security agreement is subordinate to existing bank financing and the Debentures (as defined below) that currently have a principle balance due of $775,000 and the Amended Notes that currently have a balance due of $891,500. Additionally, the Company issued three-year warrants to purchase an aggregate of 340,000 shares of the Company’s common stock at an exercise price of $0.40 per share, subject to standard anti-dilution adjustments. As of September 30, 2014 and December 31, 2013 $340,000 was outstanding under these notes. | |||||||||
The conversion price of the May 2012 Notes are subject to full ratchet anti-dilution provisions and also subject to adjustment based on stock splits, stock dividends, spin-offs, rights offerings, or recapitalization through a large, nonrecurring cash dividend. Each of the agreements governing the May 2012 Notes include an anti-dilution provision that allows for the automatic reset of the conversion price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the current conversion price of the May 2012 Notes. As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and characterized the fair value of the conversion feature of the notes as derivative liabilities upon issuance. The fair value of the conversion features and warrants was considered a note discount at issuance and was amortized as interest expense over the life of the Note. As of September 30, 2014 and December 31, 2013, the note discount was fully amortized. |
3_DERIVATIVE_LIABILITY
3. DERIVATIVE LIABILITY | 9 Months Ended | ||||||||
Sep. 30, 2014 | |||||||||
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' | ||||||||
DERIVATIVE LIABILITY | ' | ||||||||
In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion feature of the Company’s Debentures (described in Note 2), and the related warrants, do not have fixed settlement provisions because their conversion and exercise prices, respectively, may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the holders of the Debentures from the potential dilution associated with future financings. In accordance with the FASB authoritative guidance, the conversion feature of the Debentures was separated from the host contract (i.e., the Debentures) and recognized as a derivative instrument. Both the conversion feature of the Debentures and the related warrants have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations. | |||||||||
The derivative liabilities were valued using a probability weighted average Black-Scholes Merton Option pricing model with the following assumptions: | |||||||||
September 30, | 31-Dec-13 | ||||||||
2014 | |||||||||
Conversion feature: | |||||||||
Risk-free interest rate | 0.1 | % | 0.13 | % | |||||
Expected volatility | 291 | % | 229 | % | |||||
Expected life (in years) | .75 years | .75 years | |||||||
Expected dividend yield | 0 | 0 | |||||||
Warrants: | |||||||||
Risk-free interest rate | 0.1 | % | 0.13 | % | |||||
Expected volatility | 291 | % | 229 | % | |||||
Expected life (in years) | 1.00 years | 1.75 years | |||||||
Expected dividend yield | 0 | 0 | |||||||
Fair Value: | |||||||||
Conversion feature | $ | 673,435 | $ | 982,792 | |||||
Warrants | 117,107 | 94,000 | |||||||
$ | 790,542 | $ | 1,076,792 | ||||||
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility was based on the historical statistical volatility of the Company over the past 12 months. The expected life of the conversion feature of the Debentures was based on the term of the Debentures and the expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future. | |||||||||
As of September 30, 2014 and December 31, 2013, the aggregate derivative liability of the conversion feature and the warrants was $790,542 and $1,076,792 respectively. For the nine months ended September 30, 2014, the Company recorded a change in fair value of the derivative liabilities of $286,250. |
4_STOCK_OPTIONS_AND_WARRANTS
4. STOCK OPTIONS AND WARRANTS | 9 Months Ended | ||||||||||||||||||||||
Sep. 30, 2014 | |||||||||||||||||||||||
Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ' | ||||||||||||||||||||||
STOCK OPTIONS AND WARRANTS | ' | ||||||||||||||||||||||
Stock Options | |||||||||||||||||||||||
Under our 2008 Stock Incentive plan, we have authorized 7,500,000 shares of common stock for employee incentive. As September 30, 2014, no options to purchase shares of common stock were issued and outstanding under the 2008 Plan. | |||||||||||||||||||||||
Warrants | |||||||||||||||||||||||
At September 30, 2014, warrants shares outstanding were as follows: | |||||||||||||||||||||||
Shares | Weighted | ||||||||||||||||||||||
Average Exercise Price | |||||||||||||||||||||||
Balance at December 31, 2013 | 10,295,500 | $ | 0.44 | ||||||||||||||||||||
Granted | – | – | |||||||||||||||||||||
Exercised | – | – | |||||||||||||||||||||
Expired | – | – | |||||||||||||||||||||
Balance at September 30, 2014 | 10,295,500 | $ | 0.44 | ||||||||||||||||||||
The following table summarizes information about stock warrants outstanding and exercisable as of September 30, 2014: | |||||||||||||||||||||||
Warrants Outstanding | Warrants Exercisable | ||||||||||||||||||||||
Range of | Number | Weighted | Weighted | Number | Weighted | ||||||||||||||||||
Exercise | of Shares | Average | Average | of Shares | Average | ||||||||||||||||||
Prices | Underlying | Exercise | Remaining Contractual | Exercise Price | |||||||||||||||||||
Warrants | Price | Life (in years) | |||||||||||||||||||||
$ | 0.4 | 8,745,500 | (i) | $ | 0.4 | 1.75 | 8,745,500 | $ | 0.4 | ||||||||||||||
$ | 0.64 | 1,500,000 | $ | 0.64 | 2.25 | 1,500,000 | $ | 0.64 | |||||||||||||||
$ | 1 | 50,000 | $ | 1 | 1.25 | 50,000 | $ | 1 | |||||||||||||||
10,295,500 | 10,295,500 | ||||||||||||||||||||||
As of September 30, 2014, there was no intrinsic value of the warrants outstanding and exercisable | |||||||||||||||||||||||
(i) As of September 30, 2014, agreements governing 1,843,000 of the warrants exercisable at $0.40 per share include an anti-dilution provision that allows for the automatic reset of the exercise price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance, exercise or conversion price below the exercise price of these warrants. |
5_RELATED_PARTY_TRANSACTIONS
5. RELATED PARTY TRANSACTIONS | 9 Months Ended |
Sep. 30, 2014 | |
Related Party Transactions [Abstract] | ' |
RELATED PARTY TRANSACTIONS | ' |
Amounts due Shareholder | |
As of September 30, 2014 and December 31, 2013, $5,018 of advances from shareholders was advanced to the Company by its President, Mr. Balwinder Samra, and is payable to Mr. Samra. This amount due to Mr. Samra, a related party, is unsecured, non-interest bearing, and does not have defined terms of repayment. | |
As of September 30, 2014 and December 31, 2013 our Chief Executive Officer, Mr. Balwinder Samra, was owed an aggregate amount of $979,000 and $804,467, respectively in accrued salaries earned in prior periods under the terms of his employment agreement, which amounts are included in the balance of accrued expenses to officer on the accompanying balance sheet. | |
Transactions with related entities | |
During the nine months ended September 30, 2014, the Company made purchases of $279,264 from related parties. As of September 30, 2014 and December 2013, the Company had trade accounts payable to related parties of $2,942,650 and $2,700,250, respectively. The related parties are suppliers of the Company related by common ownership to the Company’s Chairman. |
1_NATURE_OF_BUSINESS_AND_SIGNI1
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Policies) | 9 Months Ended | |||||||||||||||||
Sep. 30, 2014 | ||||||||||||||||||
Accounting Policies [Abstract] | ' | |||||||||||||||||
The Company | ' | |||||||||||||||||
The Company | ||||||||||||||||||
Balqon Corporation, a California corporation (“Balqon California”), was incorporated on April 21, 2005 and commenced business operations in 2006. On October 24, 2008, Balqon California completed a merger with BMR Solutions Inc., a Nevada corporation (“BMR”), with BMR being the survivor of the merger. Upon the closing, BMR changed its name to Balqon Corporation (the “Company”). The Company develops and manufactures complete drive systems and battery systems for electric vehicles, industrial equipment and renewable energy storage devices. The Company also designs and assembles electric powered yard tractors, short haul drayage tractors and inner city Class 7 and 8 delivery trucks utilizing its proprietary drive system technologies. | ||||||||||||||||||
Basis of Presentation of Unaudited Financial Information | ' | |||||||||||||||||
Basis of Presentation of Unaudited Financial Information | ||||||||||||||||||
The unaudited financial statements of the Company for the three and nine months ended September 30, 2014 and 2013 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-K for scaled disclosures for smaller reporting companies. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the Company’s financial position and results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The balance sheet information as of December 31, 2013 was derived from the audited financial statements included in the Company’s financial statements as of and for the years ended December 31, 2013 and 2012 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 15, 2014. These financial statements should be read in conjunction with that report. | ||||||||||||||||||
Going Concern | ' | |||||||||||||||||
Going Concern | ||||||||||||||||||
The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the nine months ended September 30, 2014, the Company utilized cash flow from operations of $18,449, and incurred a net loss of $201,797. As of September 30, 2014, the Company had shareholders’ deficiency of $11,354,706. In addition, the Company has not paid $402,823 in payroll taxes and is delinquent in payment of $3,361,500 in principal of its convertible notes and $1,068,115 of interest due on convertible notes payable. Pursuant to the terms of the notes, the non-payment of principal and interest by the Company constitutes an event of default and, as a result, the holders of the notes may accelerate payment of all amounts outstanding under the notes by giving written notice to the Company and thereby requiring that the Company immediately pay all principal and accrued and unpaid interest. If the holders of the notes were to declare the notes due and payable, the Company presently does not have the ability to pay these notes. In addition, as of September 30, 2014, $2,006,500 of the notes are secured under the terms of a security agreement granting the holders of the notes a security interest in all of the Company’s assets (including all intellectual property assets of the Company) subject to the interests of the holders of senior indebtedness (as that term is defined in the notes). | ||||||||||||||||||
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and to ultimately achieve sustainable revenues and profitable operations. The Company’s independent auditors, in their report on our financial statements for the year ending December 31, 2013, expressed substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of these uncertainties. | ||||||||||||||||||
The Company does not currently have sufficient liquidity to meet its anticipated working capital, debt service and other liquidity needs in the very near-term. The Company believes that it has sufficient working capital to continue operations only through the next six month unless it successfully restructures its debt, experiences a significant improvement in sales and obtains other sources of liquidity. In addition, although various secured creditors holding approximately $2,006,500 in secured convertible notes and secured debentures have not exercised their rights to foreclose on all of the Company’s assets (including its intellectual property assets), no assurance can be given that these holders of secured debt will not exercise their remedies under the Company’s outstanding secured notes and secured debentures. | ||||||||||||||||||
The Company has been, and currently is, working towards identifying and obtaining new sources of financing. No assurances can be given that the Company will be successful in obtaining additional financing in the future. Any future financing that the Company may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that the Company is able to obtain will likely include financial and other covenants that will restrict the Company’s flexibility. At a minimum, the Company expects these covenants to include restrictions on its ability to pay dividends on its common stock. Any failure to comply with these covenants would have a material adverse effect on the Company’s business, prospects, financial condition, results of operations and cash flows. In addition, the Company’s senior secured convertible debentures issued between July and December 2010 contain covenants that include restrictions on the Company’s ability to pay dividends on its common stock. | ||||||||||||||||||
If adequate funds are not available, the Company may be required to delay, scale back or eliminate portions of its operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require the Company to relinquish rights to certain of its technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of the Company’s proprietary technology and other important assets and could also adversely affect its ability to fund the Company’s continued operations and its product and service development efforts. Although the Company is actively pursuing a number of alternatives, including seeking to restructure its debt and seeking to raise additional debt or equity financing, or both, there can be no assurance that the Company will be successful. | ||||||||||||||||||
Estimates | ' | |||||||||||||||||
Estimates | ||||||||||||||||||
The preparation of 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Material estimates relate to the recognition of contract revenues and estimated costs to complete, recoverability of reported amounts of long-lived assets, and assumptions made in valuing derivative instruments and equity instruments issued for compensation. Actual results may differ from those estimates. | ||||||||||||||||||
Revenues | ' | |||||||||||||||||
Revenues | ||||||||||||||||||
Sales of Production Units and Parts | ||||||||||||||||||
The Company recognizes revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of our product or delivery of the product to the destination specified by the customer. | ||||||||||||||||||
The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs when the Company places the products with the buyer’s carrier. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured. Except for warranties, the Company has no post-sales obligations. | ||||||||||||||||||
Inventories | ' | |||||||||||||||||
Inventories | ||||||||||||||||||
Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Recorded inventories at September 30, 2014 and December 31, 2013 do not include approximately $172,000 and $326,000 of batteries and other items held on consignment from Seven One Battery Company, an affiliate of the Company’s Chairman of the Board (See Note 5). Inventories consist of raw materials. | ||||||||||||||||||
Loss Per Share | ' | |||||||||||||||||
Basic loss per share has been computed using the weighted average number of common shares outstanding and issuable during the period. Diluted loss per share is computed based on the weighted average number of common shares and all common equivalent shares outstanding during the period in which they are dilutive. Common equivalent shares consist of shares issuable upon the exercise of stock options, warrants or other convertible securities such as convertible notes. For the nine months ended September 30, 2014 and 2013 and the three months ended September 30, 2013, common stock equivalent shares have been excluded from the calculation of loss per share as their effect is anti-dilutive. For the three months ended September 30, 2014, the effect of potentially dilutive securities is not reflected in diluted net income per share as the exercise prices of common stock equivalents were higher than the average fair market value of common shares during the reporting period. | ||||||||||||||||||
The following table summarizes the weighted average shares and common stock equivalents outstanding as of September 30, 2014 and 2013: | ||||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2014 | 2013 | |||||||||||||||||
Weighted average shares outstanding | 36,891,530 | 36,891,530 | ||||||||||||||||
Common stock equivalents: | ||||||||||||||||||
Warrants exercisable into common shares | 10,295,500 | 10,295,500 | ||||||||||||||||
Notes payable convertible into common shares | 6,814,583 | 6,814,583 | ||||||||||||||||
Total common stock equivalents | 17,110,083 | 17,110,083 | ||||||||||||||||
Financial Assets and Liabilities Measured at Fair Value | ' | |||||||||||||||||
Financial Assets and Liabilities Measured at Fair Value | ||||||||||||||||||
The Company’s financial instruments include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses and accounts payable to related party. Management considers the carrying amounts to approximate their fair values due to their short-term nature. The Company also has outstanding convertible notes whose recorded value approximates its market value based upon the effective interest rates of the notes. The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the condensed balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets: | ||||||||||||||||||
Level 1 Quoted prices in active markets for identical assets or liabilities. | ||||||||||||||||||
Level 2 Inputs, other than the quoted prices in active markets, that is observable either directly or indirectly. | ||||||||||||||||||
Level 3 Unobservable inputs based on the Company’s assumptions. | ||||||||||||||||||
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2014 and December 31, 2013. | ||||||||||||||||||
30-Sep-14 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Fair value of Derivative Liability | $ | – | $ | – | $ | 790,542 | $ | 790,542 | ||||||||||
31-Dec-13 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Fair value of Derivative Liability | $ | – | $ | – | $ | 1,076,792 | $ | 1,076,792 | ||||||||||
Derivative Financial Instruments | ' | |||||||||||||||||
Derivative Financial Instruments | ||||||||||||||||||
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The Company uses a probability weighted average Black-Scholes-Merton model to value the derivative instruments. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. | ||||||||||||||||||
Concentrations | ' | |||||||||||||||||
Concentrations | ||||||||||||||||||
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and unsecured accounts receivable. | ||||||||||||||||||
The Company maintains cash balances at one bank. At times, the amount on deposit exceeds the federally insured limits. Management believes that the financial institution that holds the Company’s cash is financially sound and, accordingly, minimal credit risk exists. As of September 30, 2014 and September 30, 2013 the Company did not have any amount in excess of insured limits maintained at the bank. | ||||||||||||||||||
For the nine months ended September 30, 2014, 34% of total revenues were from one customer. For the three months ended September 30, 2014, 73% of total revenues were from one customer. For the nine months ended September 30, 2013, 29% of total revenues were from one customer. For the three months ended September 30, 2013, 57% of total revenues were from one customer. At September 30, 2014, a single customer represented 45% of total accounts receivable. Accounts receivable from a single customer represented 69% of total accounts receivable at December 31, 2013. | ||||||||||||||||||
For the nine months ended September 30, 2014, 45% of costs of revenue were to one vendor. For the nine months ended September 30, 2013 87% of the cost of revenue were to one vendor. For the three months ended September 30, 2014, 80% of costs of revenue were to one vendor. For the three months ended September 30, 2013, 86% of costs of revenue were to one vendor. | ||||||||||||||||||
At September 30, 2014, accounts payable to the largest vendor represented 57% of total accounts payable. The vendor is a related party. (See Note 5). At September 30, 2013, accounts payable to largest vendor represented 60% of total account payable balance. The vendor is a related party (see Note 5). | ||||||||||||||||||
Recent Accounting Pronouncements | ' | |||||||||||||||||
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting. | ||||||||||||||||||
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)." ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition. | ||||||||||||||||||
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 on the Company’s financial statement presentation and disclosures. | ||||||||||||||||||
Other accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements. |
1_NATURE_OF_BUSINESS_AND_SIGNI2
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Tables) | 9 Months Ended | |||||||||||||||||
Sep. 30, 2014 | ||||||||||||||||||
Accounting Policies [Abstract] | ' | |||||||||||||||||
Common stock equivalents | ' | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2014 | 2013 | |||||||||||||||||
Weighted average shares outstanding | 36,891,530 | 36,891,530 | ||||||||||||||||
Common stock equivalents: | ||||||||||||||||||
Warrants exercisable into common shares | 10,295,500 | 10,295,500 | ||||||||||||||||
Notes payable convertible into common shares | 6,814,583 | 6,814,583 | ||||||||||||||||
Total common stock equivalents | 17,110,083 | 17,110,083 | ||||||||||||||||
Financial Assets and Liabilities Measured at Fair Value | ' | |||||||||||||||||
30-Sep-14 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Fair value of Derivative Liability | $ | – | $ | – | $ | 790,542 | $ | 790,542 | ||||||||||
31-Dec-13 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Fair value of Derivative Liability | $ | – | $ | – | $ | 1,076,792 | $ | 1,076,792 |
2_CONVERTIBLE_PROMISSORY_NOTES1
2. CONVERTIBLE PROMISSORY NOTES In Default (Tables) | 9 Months Ended | ||||||||
Sep. 30, 2014 | |||||||||
Debt Disclosure [Abstract] | ' | ||||||||
Schedule of convertible notes payable | ' | ||||||||
September 30, | December 31, | ||||||||
2014 | 2013 | ||||||||
Subordinated secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (1) | $ | 891,500 | $ | 891,500 | |||||
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2012 (2) | 25,000 | 25,000 | |||||||
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due September 1, 2012 (3) | 1,330,000 | 1,330,000 | |||||||
Senior secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 (4) | 775,000 | 775,000 | |||||||
Secured Convertible Note Payable, Interest at 10% per annum payable quarterly, due March 31, 2013 (5) | 340,000 | 340,000 | |||||||
Convertible notes payable | $ | 3,361,500 | $ | 3,361,500 |
3_DERIVATIVE_LIABILITY_Tables
3. DERIVATIVE LIABILITY (Tables) | 9 Months Ended | ||||||||
Sep. 30, 2014 | |||||||||
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' | ||||||||
Derivative liability | ' | ||||||||
September 30, | 31-Dec-13 | ||||||||
2014 | |||||||||
Conversion feature: | |||||||||
Risk-free interest rate | 0.1 | % | 0.13 | % | |||||
Expected volatility | 291 | % | 229 | % | |||||
Expected life (in years) | .75 years | .75 years | |||||||
Expected dividend yield | 0 | 0 | |||||||
Warrants: | |||||||||
Risk-free interest rate | 0.1 | % | 0.13 | % | |||||
Expected volatility | 291 | % | 229 | % | |||||
Expected life (in years) | 1.00 years | 1.75 years | |||||||
Expected dividend yield | 0 | 0 | |||||||
Fair Value: | |||||||||
Conversion feature | $ | 673,435 | $ | 982,792 | |||||
Warrants | 117,107 | 94,000 | |||||||
$ | 790,542 | $ | 1,076,792 |
4_STOCK_OPTIONS_AND_WARRANTS_T
4. STOCK OPTIONS AND WARRANTS (Tables) | 9 Months Ended | ||||||||||||||||||||||
Sep. 30, 2014 | |||||||||||||||||||||||
Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ' | ||||||||||||||||||||||
Stock options and warrants | ' | ||||||||||||||||||||||
Shares | Weighted | ||||||||||||||||||||||
Average Exercise Price | |||||||||||||||||||||||
Balance at December 31, 2013 | 10,295,500 | $ | 0.44 | ||||||||||||||||||||
Granted | – | – | |||||||||||||||||||||
Exercised | – | – | |||||||||||||||||||||
Expired | – | – | |||||||||||||||||||||
Balance at September 30, 2014 | 10,295,500 | $ | 0.44 | ||||||||||||||||||||
Stock warrants outstanding and exercisable | ' | ||||||||||||||||||||||
Warrants Outstanding | Warrants Exercisable | ||||||||||||||||||||||
Range of | Number | Weighted | Weighted | Number | Weighted | ||||||||||||||||||
Exercise | of Shares | Average | Average | of Shares | Average | ||||||||||||||||||
Prices | Underlying | Exercise | Remaining Contractual | Exercise Price | |||||||||||||||||||
Warrants | Price | Life (in years) | |||||||||||||||||||||
$ | 0.4 | 8,745,500 | (i) | $ | 0.4 | 1.75 | 8,745,500 | $ | 0.4 | ||||||||||||||
$ | 0.64 | 1,500,000 | $ | 0.64 | 2.25 | 1,500,000 | $ | 0.64 | |||||||||||||||
$ | 1 | 50,000 | $ | 1 | 1.25 | 50,000 | $ | 1 | |||||||||||||||
10,295,500 | 10,295,500 |
1_NATURE_OF_BUSINESS_AND_SIGNI3
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Details-Antidilutive shares) | 9 Months Ended | |
Sep. 30, 2014 | Sep. 30, 2013 | |
Total potentially dilutive shares | 17,110,083 | 17,110,083 |
Weighted average shares outstanding | 36,891,530 | 36,891,530 |
Warrants | ' | ' |
Total potentially dilutive shares | 10,295,500 | 10,295,500 |
Convertible notes payable | ' | ' |
Total potentially dilutive shares | 6,814,583 | 6,814,583 |
1_NATURE_OF_BUSINESS_AND_SIGNI4
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Details-Fair values) (Fair Value, Measurements, Recurring [Member], USD $) | Sep. 30, 2014 | Dec. 31, 2013 |
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ' | ' |
Fair value of Derivative Liability | $790,542 | $1,076,792 |
Level 1 [Member] | ' | ' |
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ' | ' |
Fair value of Derivative Liability | 0 | 0 |
Level 2 [Member] | ' | ' |
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ' | ' |
Fair value of Derivative Liability | 0 | 0 |
Level 3 [Member] | ' | ' |
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ' | ' |
Fair value of Derivative Liability | $790,542 | $1,076,792 |
1_NATURE_OF_BUSINESS_AND_SIGNI5
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) (USD $) | Sep. 30, 2014 | Dec. 31, 2013 | Sep. 30, 2014 | Sep. 30, 2013 | Sep. 30, 2014 | Sep. 30, 2013 | Sep. 30, 2014 | Dec. 31, 2013 | Sep. 30, 2014 | Sep. 30, 2013 | Sep. 30, 2014 | Sep. 30, 2013 | Sep. 30, 2014 | Dec. 31, 2013 |
Revenues [Member] | Revenues [Member] | Revenues [Member] | Revenues [Member] | Accounts Receivable [Member] | Accounts Receivable [Member] | Cost of Sales [Member] | Cost of Sales [Member] | Cost of Sales [Member] | Cost of Sales [Member] | Accounts Payable [Member] | Accounts Payable [Member] | |||
One Customer [Member] | One Customer [Member] | One Customer [Member] | One Customer [Member] | One Customer [Member] | One Customer [Member] | One Vendor [Member] | One Vendor [Member] | One Vendor [Member] | One Vendor [Member] | One Vendor [Member] | One Vendor [Member] | |||
Delinquent payroll taxes | $402,823 | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' |
Convertible notes in default | 3,361,500 | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' |
Interest on convertible notes in default | 1,068,115 | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' |
Secured debentures | 2,006,500 | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' |
Inventory held on consignment | $172,000 | $326,000 | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' | ' |
Major customers concentration risk | ' | ' | 73.00% | 57.00% | 34.00% | 29.00% | 45.00% | 69.00% | 80.00% | 86.00% | 45.00% | 87.00% | 57.00% | 60.00% |
2_CONVERTIBLE_PROMISSORY_NOTES2
2. CONVERTIBLE PROMISSORY NOTES (Details) (USD $) | Sep. 30, 2014 | Dec. 31, 2013 |
Debt Instrument [Line Items] | ' | ' |
Convertible notes payable | $3,361,500 | $3,361,500 |
Subordinated secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 [Member] | ' | ' |
Debt Instrument [Line Items] | ' | ' |
Convertible notes payable | 891,500 | 891,500 |
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2012 [Member] | ' | ' |
Debt Instrument [Line Items] | ' | ' |
Convertible notes payable | 25,000 | 25,000 |
Subordinated unsecured convertible notes payable, interest at 10% per annum payable quarterly, due September 1, 2012 [Member] | ' | ' |
Debt Instrument [Line Items] | ' | ' |
Convertible notes payable | 1,330,000 | 1,330,000 |
Senior secured convertible notes payable, interest at 10% per annum payable quarterly, due March 31, 2013 [Member] | ' | ' |
Debt Instrument [Line Items] | ' | ' |
Convertible notes payable | 775,000 | 775,000 |
Secured Convertible Note Payable, Interest at 10% per annum payable quarterly, due March 31, 2013 [Member] | ' | ' |
Debt Instrument [Line Items] | ' | ' |
Convertible notes payable | $340,000 | $340,000 |
3_DERIVATIVE_LIABILITY_Details
3. DERIVATIVE LIABILITY (Details) (USD $) | 9 Months Ended | 12 Months Ended |
Sep. 30, 2014 | Dec. 31, 2013 | |
Derivative liability Fair value | $790,542 | $1,076,792 |
Conversion Feature | ' | ' |
Derivative liability Fair value | 673,435 | 982,792 |
Risk-free interest rate | 0.10% | 0.13% |
Expected volatility | 291.00% | 229.00% |
Expected life (in years) | '9 months | '9 months |
Expected dividend yield | 0.00% | 0.00% |
Warrants | ' | ' |
Derivative liability Fair value | $117,107 | $94,000 |
Risk-free interest rate | 0.10% | 0.13% |
Expected volatility | 291.00% | 229.00% |
Expected life (in years) | '1 year | '1 year 9 months |
Expected dividend yield | 0.00% | 0.00% |
3_DERIVATIVE_LIABILITY_Details1
3. DERIVATIVE LIABILITY (Details Narrative) (USD $) | 3 Months Ended | 9 Months Ended | |||
Sep. 30, 2014 | Sep. 30, 2013 | Sep. 30, 2014 | Sep. 30, 2013 | Dec. 31, 2013 | |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' | ' | ' | ' | ' |
Derivative liability Fair value | $790,542 | ' | $790,542 | ' | $1,076,792 |
Change in fair value of the derivative liabilities | $787,996 | $337,039 | $286,250 | $79,000 | ' |
4_STOCK_OPTIONS_AND_WARRANTS_D
4. STOCK OPTIONS AND WARRANTS (Details-Warrant activity) (Warrants, USD $) | 9 Months Ended |
Sep. 30, 2014 | |
Warrants | ' |
Shares | ' |
Balance, beginning | 10,295,500 |
Granted | ' |
Exercised | ' |
Expired | ' |
Balance, ending | 10,295,500 |
Weighted Average Exercise Price | ' |
Balance, beginning | $0.44 |
Granted | ' |
Exercised | ' |
Expired | ' |
Balance, ending | $0.44 |
4_STOCK_OPTIONS_AND_WARRANTS_D1
4. STOCK OPTIONS AND WARRANTS (Details-Warrants outstanding) (USD $) | 9 Months Ended |
Sep. 30, 2014 | |
Warrants Outstanding | ' |
Warrants Outstanding | ' |
Number of shares underlying warrants | 10,295,500 |
Warrants Exercisable | ' |
Warrants Outstanding | ' |
Warrants Exercisable | 10,295,500 |
Number of warrants exercisable | 10,295,500 |
$0.40 | ' |
Warrants Outstanding | ' |
Number of shares underlying warrants | 8,745,500 |
Weighted average exercise price | $0.40 |
Weighted average remaining contractual life | '1 year 9 months |
Warrants Exercisable | 8,745,500 |
Number of warrants exercisable | 8,745,500 |
Weighted average exercise price, exercisable | $0.40 |
$0.64 | ' |
Warrants Outstanding | ' |
Number of shares underlying warrants | 1,500,000 |
Weighted average exercise price | $0.64 |
Weighted average remaining contractual life | '2 years 3 months |
Warrants Exercisable | 1,500,000 |
Number of warrants exercisable | 1,500,000 |
Weighted average exercise price, exercisable | $0.64 |
$1.00 | ' |
Warrants Outstanding | ' |
Number of shares underlying warrants | 50,000 |
Weighted average exercise price | $1 |
Weighted average remaining contractual life | '1 year 3 months |
Warrants Exercisable | 50,000 |
Number of warrants exercisable | 50,000 |
Weighted average exercise price, exercisable | $1 |
5_RELATED_PARTY_TRANSACTIONS_D
5. RELATED PARTY TRANSACTIONS (Details Narrative) (USD $) | 9 Months Ended | |
Sep. 30, 2014 | Dec. 31, 2013 | |
Related Party Transactions [Abstract] | ' | ' |
Proceeds from related parties | $5,018 | ' |
Accrued salaries | 979,000 | 804,467 |
Related party account receivables | ' | 198,067 |
Related party purchases | 279,264 | ' |
Related party accounts payable | $2,942,650 | $2,700,250 |