The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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 have changed the fiscal year end of Thinspace UK and Thinspace USA to December 31 to match that of Vanity Events year end prior to merger.
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 months ended March 31, 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 months ended March 31, 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 March 31, 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 year ended December 31, 2013, included in the Company’s annual report on Form 10-K filed with the SEC on March 31, 2014.
The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited financial statements at that date but do not include all disclosures required by the accounting principles generally accepted in the United States of America.
Going Concern
We have incurred a net loss of $25,922,129 for the three months ended March 31, 2014. As of March 31, 2014 we have negative working capital of $38,038,819 and a stockholders’ deficit of $37,712,515. As a result, there is substantial doubt about the Company’s ability to continue as a going concern at March 31, 2014.
Management has implemented its business plan to add new products, increase marketing activities and, as a result, increase revenue. Our ability 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 would 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 $318,573 and $387,279 as of March 31, 2014 and December 31, 2013, respectively, do not included 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 March 31, 2014:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Liabilities | | | | | | | | | | | | | | | | |
| Conversion and warrant derivative liabilities | | | - | | | | - | | | $ | 36,036,431 | | | $ | 36,036,431 | |
| Total Liabilities | | $ | - | | | $ | - | | | $ | 36,036,431 | | | $ | 36,036,431 | |
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 three month period ended March 31, 2014.
| | | 2014 | |
| Balance at beginning of year | | $ | 11,268,087 | |
| Additions to derivative instruments | | | 4,028,280 | |
| Change in fair value of derivative liabilities | | | 21,752,944 | |
| Reclassification upon conversion of debt | | | (1,012,880 | ) |
| Balance at end of period | | $ | 36,036,431 | |
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 March 31, 2014, two customers accounted for 45% 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 March 31, 2014 (approximately $140,000 at March 31, 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 171,022,597 common share equivalents at March 31, 2014 and none at March 31, 2013, which have been excluded from the computation of the weighted average diluted shares.
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 February 21, 2014 Financing
On February 21, 2014, the Company entered into a Securities Purchase Agreement with IBC Funds, LLC (“IBC”) pursuant to which the Company sold to IBC 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 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 March 21, 2014 Financing
On March 21, 2014, the Company entered into a Securities Purchase Agreement with IBC pursuant to which the Company sold to IBC 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.
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. At issue, we have recorded conversion feature liabilities of $2,729,757. 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 0.75 - 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 419%; and (4) an expected life of 3 years. The Company has allocated $300,000 to debt discount, to be amortized over the life of the debt, with the balance of $2,429,757 being charged to expense at issue.
During the three months ended March 31, 2014, $191,184 of principal and $11,409 of accrued interest was converted into 4,051,870 shares of common stock. The Company has recorded expense of $202,943 for the three months ended March 31, 2014 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 notes, convertible preferred stock, common stock purchase warrants and a debt purchase agreement. Since certain of the notes, 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 Notes and Debt Settlement Agreement
At March 31, 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 March 31, 2014 was $20,297,745. The value of the conversion liabilities was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 412% and (4) an expected life of 2.75 years. We recorded expense of $10,392,894 during the three months ended March 31, 2014 related to the change in fair value.
During the three months ended March 31, 2014 we recorded additions to our derivative conversion liabilities related to the conversion feature attributable to interest accrued during the period. These additions aggregated $265,158 for the three months ended March 31, 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 March 31, 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 March 31, 2014 was $9,901,117. 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 0.139%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 262% and (4) an expected life of 1.125 years. We recorded expense of $7,162,551 during the three months ended March 31, 2014 related to the change in fair value.
Warrant Liabilities
The warrants with price reset features have been adjusted due to the subsequent issuance of debt. As a result, those warrants now total 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.
At March 31, 2014, we recalculated the fair value of the warrants containing a price reset feature subject to derivative accounting and have determined that the fair value at March 31, 2014 was $5,837,569. 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 0.04%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 206% and (4) an expected life of 0.30 years. We recorded expense of $4,016,569 during the three months ended March 31, 2014 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 $20,000 during the three months ended March 31, 2013. The Company repaid approximately $39,000 of loans during the three months ended March 31, 2014.
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 March 31, 2014 and 2013 were $0 and $111,633, 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 March 31, 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 March 31, 2014 and December 31, 2013, there were 91,621,564 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 months ended March 31, 2014, we recorded expense of $312,500.
During January 2014 we cancelled 250,000 shares of common stock which had been issued by Vanity in July of 2012 as payment for consulting services, pursuant to the request of the consultant.
During the three months ended March 31, 2014, we issued 4,051,870 shares of common stock upon the conversion of $191,184 of note principal and $11,409 of accrued interest.
Warrants Outstanding
At March 31, 2014 we have an aggregate of 8,700,000 common stock purchase warrants outstanding and exercisable. The warrants currently have an exercise price of $0.05 per share. The warrants expire on various dates between April 5, 2014 and November 10, 2014 and have a weighted average remaining life of 0.30 years at March 31, 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 March 31, 2014 and 2013 was $37,283 and $30,772, 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
Goldcrest Stock Purchase Agreement
On April 2, 2014, Thinspace UK entered into a stock purchase agreement (the “Purchase Agreement”) with Goldcrest Distribution Limited (“Goldcrest”). Pursuant to the Purchase Agreement, Thinspace UK may, for a period of one year commencing upon the execution of the Purchase Agreement, and upon receipt of orders from customers, request funding for such orders from Goldcrest, which Goldcrest may provide at its discretion, in an aggregate amount of up to £1.8 million (approximately USD$3.02 million). The Purchase Agreement was entered into in connection with a purchase order received by Thinspace UK in the amount of £2,307,357. Pursuant to the Purchase Agreement, Thinspace UK paid Goldcrest an establishment fee of £36,150 and agreed to pay a transaction fee of 3% for a transaction period of 3 months for advances under the Purchase Agreement. Thinspace UK’s obligations under the Purchase Agreement will be secured by a debenture over the assets of Thinspace UK and personal guarantees executed by Owen Dukes and Robert Zysblat, the Company’s Chief Executive Officer and President, respectively.
Greystone $65K 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 up to $65,000 (it being agreed that any such amounts (up to $65,000) may be paid by Greystone to the Company in Greystone’s discretion during the 90 pay period commencing on the date of issuance of the debenture). 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 25% of the lowest closing bid price for the Company’s common stock during the previous 20 trading days. We have received $65,000 pursuant to this agreement. 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 $100K Financing
On April 17, 2014, the Company entered into a Securities Purchase Agreement with IBC pursuant to which the Company sold to IBC an 8% convertible debenture in the principal amount of up to $100,000 (it being agreed that any such amounts (up to $100,000) may be paid by IBC to the Company in IBC’s discretion during the 90 pay period commencing on the date of issuance of the debenture). 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. IBC 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 25% of the lowest closing bid price for the Company’s common stock during the previous 20 trading days. We have received $50,000 pursuant to this agreement. 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.
Common Shares Issued
Effective April 15, 2014 and April 30, 2014 we issued an aggregate of 277,354 shares of common stock to our 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.
