Thinspace Technology (THNS) 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________________

Commission file number: 000-52524

THINSPACE TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

Delaware	43-2114545
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5535 S. Williamson Blvd, Unit 751 Port Orange, FL	32128
(Address of principal executive offices)	(zip code)

(786) 763-3830

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filero	Accelerated filero
Non-accelerated filero (Do not check if smaller reporting company)	Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o    No þ

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date, 99,398,536 shares of common stock are issued and outstanding as of November 13, 2014.

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements.	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	18
Item 4	Controls and Procedures.	18
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	18
Item 1A.	Risk Factors.	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	18
Item 3.	Defaults Upon Senior Securities.	19
Item 4.	Mine Safety Disclosures.	19
Item 5.	Other Information.	19
Item 6.	Exhibits.	20

2

THINSPACE TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2014			2013
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	81,897		$	341,031
Receivable from sale of preferred stock		-			472,000
Accounts receivable		319,853			387,279
Inventory		45,954			4,634
Prepaid expenses and other current assets		98,778			36,263
Total current assets		546,482			1,241,207
Fixed assets, net of accumulated depreciation of $70,940 and $60,312, respectively		37,572			31,325
Intangible assets, net of accumulated amortization of $495,505 and $454,416, respectively		164,350			194,743
Prepaid stock based compensation		312,500			-
Other assets		10,711			3,049
Total assets	$	1,071,615		$	1,470,324
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable and accrued expenses	$	1,585,630		$	1,610,753
Deferred revenue		1,126,929			1,482,504
Loans payable, current portion		14,800			74,800
Loans payable - related parties		-			117,348
Derivative liabilities		31,240,660			11,268,087
Total current liabilities		33,968,019			14,553,492
Deferred revenue, long term		60,429			73,897
Convertible notes payable, net of discount of $1,195,341 and $311,806, respectively		921,240			862,019
Loans payable		13,392			25,266
Total liabilities		34,963,080			15,514,674
Stockholders' deficit
Preferred stock, undesignated, authorized 49,253,000 shares, $0.001 par value, no shares issued and outstanding, respectively		-			-
Preferred stock, Series B, authorized 75,000 shares, $0.001 par value, 75,000 shares issued and outstanding		75			75
Preferred stock, Series C, authorized 672,000 shares, $0.001 par value, 672,000 shares issued and outstanding		672			672
Common stock authorized 500,000,000 shares, $0.001 par value, 96,883,942 and 82,819,694 shares issued and outstanding, respectively		96,884			82,820
Additional paid in capital		5,197,809			-
Accumulated deficit		(39,147,538	)		(14,093,652	)
Accumulated other comprehensive income (loss)		(39,367	)		(34,265	)
Total stockholders' deficit		(33,891,465	)		(14,044,350	)
Total liabilities and stockholders' deficit	$	1,071,615		$	1,470,324

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

THINSPACE TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues	$	2,322,170		$	411,606		$	5,700,775		$	984,135
Cost of goods sold		1,488,293			214,252			3,332,524			583,497
Gross profit		833,877			197,354			2,368,251			400,638
Operating expense:
Selling, general and administrative		1,486,697			632,175			4,735,832			1,269,860
Depreciation and amortization		20,964			18,275			60,999			51,405
Total operating expense		1,507,661			650,450			4,796,831			1,321,265
Loss from operations		(673,784	)		(453,096	)		(2,428,580	)		(920,627	)
(Loss) gain on change in fair value of derivative liability		(16,556,422	)		-			(15,447,215	)		-
Gain on conversion of debt		20,979			-			176,108			-
Interest expense (income)		(1,883,300	)		(67	)		(7,354,199	)		116
Loss before provision for income taxes		(19,092,527	)		(453,163	)		(25,053,886	)		(920,511	)
Provision for income taxes		-			-			-			-
Net loss		(19,092,527	)		(453,163	)		(25,053,886	)		(920,511	)
Preferred dividend		(1,875	)		-			(5,625	)		-
Net loss attributable to common shareholders	$	(19,094,402	)	$	(453,163	)	$	(25,059,511	)	$	(920,511	)
Basic and diluted loss per share	$	(0.20	)	$	(0.01	)	$	(0.27	)	$	(0.01	)
Weighted average shares outstanding, Basic and diluted		96,085,012			80,200,000			92,807,067			80,200,000
Comprehensive income (loss):
Net loss	$	(19,092,527	)	$	(453,163	)	$	(25,053,886	)	$	(920,511	)
Foreign currency translation adjustments		13,136			(80	)		(5,102	)		(6,012	)
Comprehensive loss	$	(19,079,391	)	$	(453,243	)	$	(25,058,988	)	$	(926,523	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

THINSPACE TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited)

	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net loss	$	(25,053,886	)	$	(920,511	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		60,999			51,405
Amortization of prepaid stock based compensation		937,500			-
Stock based compensation		669,678			-
Gain on conversion of debt		(176,108	)		-
Change in fair value of derivative liability		15,447,215			-
Amortization of debt discount		6,814,247			-
Changes in operating assets and liabilities:
Accounts receivable		64,722			(274,036	)
Inventory		(42,606	)		97,038
Prepaid expenses and other current assets		(63,573	)		(16,115	)
Other assets		(7,763	)		(765	)
Accounts payable and accrued expenses		(172	)		194,882
Deferred revenue		(367,243	)		941,339
Net cash (used in) provided by operating activities		(1,716,990	)		73,237
Cash flows from investing activities:
Cash paid for fixed assets		(18,421	)		(47,187	)
Net cash used in investing activities		(18,421	)		(47,187	)
Cash flows from financing activities:
Proceeds from sale of preferred stock		472,000			-
Proceeds from notes payable		1,191,000			-
Repayment of note		(75,000	)		-
Repayment of loan		(11,583	)		(11,305	)
Advances from related parties		21,000			42,518
Repayments to related parties		(118,670	)		-
Net cash provided by financing activities		1,478,747			31,213
Effect of exchange rate changes on cash		(2,470	)		(6,012	)
Net (decrease) increase in cash		(259,134	)		51,251
Cash, beginning of period		341,031			51,323
Cash, end of period	$	81,897		$	102,574
Supplemental Schedule of Cash Flow Information:
Cash paid for interest	$	288,689		$	68
Non-cash investing and financing activities:
Fair value of common stock issued upon conversion of notes	$	1,348,968		$	-
Note payable converted to common stock		233,244			-
Accrued interest converted to common stock		11,410			-
Derivative liability reclassified to equity upon conversion of debt		1,348,684			-
Derivative liability reclassified to equity upon expiration of warrants		1,892,000			-
Derivative liability of debt issued		5,959,048			-
Common stock issued as payment of prepaid consulting fees		1,250,000			-

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

THINSPACE TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

NOTE 1 – ORGANIZATION AND LINE OF BUSINESS

COMPANY OVERVIEW

Nature of Operations

THINSPACE TECHNOLOGY, INC. (formerly Vanity Events Holding, Inc.)  (the “Company”, “Thinspace” “we”, “us” or “our”), was organized as a Delaware corporation on August 25, 2004, and is a holding company. We are a cloud computing company that  develops software productivity solutions that allow our customers secure access to centrally managed desktop or software applications  and to work and collaborate from anywhere, accessing enterprise apps and data on any of the latest devices, as easily as they would in their own office- simply and securely.

The Company’s principal activity is the development and sale of network software. The company has 5 key products:

● Thinspace TSE - a simple management solution for Microsoft remote desktop users.

● Thinspace OneGate - allows secure remote access to applications and data from outside of the corporate network.

● Thinspace Universal Client – provides access to applications or Windows desktops from iPad, iPhone or Android tablet or Smartphone.

● Thinspace Pano  – The Pano is a Zero Client that replaces traditional desktops, allows secure fast access to hosted virtual desktops.

● Thinspace Client– A branded hardware Thin Client solution aimed for the enterprise and corporate market.

We sell directly to independent software vendors and Application Service Providers (ASPs) and to end users through a chain of distributors and resellers. Our larger customers are predominantly large businesses based around the world, with a concentration in North America, the Far East and India.

Our operating subsidiaries are Thinspace Technology Ltd (“Thinspace UK”), organized and operating in the United Kingdom, and Thinspace Technology Ltd. (“Thinspace USA”), a Nevada corporation formed on August 24, 2010 and operating in the states of California, Colorado and Florida.

Pursuant to an Agreement of Merger and Reorganization dated December 31, 2013 between the Company, VAEV Merger Sub, Inc., and Thinspace UK, VAEV Merger Sub merged with Thinspace UK and all of the issued and outstanding shares of Thinspace UK were exchanged for 80,200,000 shares of common stock of the Company. The transaction has been accounted for as a reverse acquisition of Vanity by Thinspace UK but in substance as a capital transaction, rather than a business combination since Vanity had minimal operations and assets as of the closing of the transaction. The stockholders of Thinspace UK owned a majority of the Company’s voting power immediately following the transaction and Thinspace UK’s management assumed operational, management and governance control of the Company. The transaction is deemed as reverse recapitalization and the accounting is similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets should be recorded.  Thinspace UK is treated as the surviving and continuing entity.   The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s historical financial statements are those of Thinspace UK and its subsidiary, Thinspace USA.

Vanity assets and liabilities retained subsequent to the transaction are as follows:

Cash	$	9,848
Other assets		1,349
Accounts payable and accrued expenses		(1,032,603	)
Notes payable		(922,019	)
Derivative liabilities		(8,504,326	)
Net liabilities retained	$	(10,447,751	)

We changed the fiscal year end of Thinspace UK and Thinspace USA to December 31 to match that of Vanity prior to the reverse acquisition.

References herein to “Vanity” refer to the Company prior to the reverse acquisition.

6

BASIS OF PRESENTATION AND GOING CONCERN

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

These interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2014 and 2013 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any future period. All references to September 30, 2014 and 2013 in these footnotes are unaudited.

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the transition period ended December 31, 2013, included in the Company’s transition report on Form 10-K/A filed with the SEC on May 13, 2014.

The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements at that date but do not include all disclosures required by GAAP. 

Going Concern

We have incurred a loss from operations of $2,428,580 for the nine months ended September 30, 2014. As of September 30, 2014 we have negative working capital of $33,421,537 and a stockholders’ deficit of $33,891,465. As a result, there is substantial doubt about the Company’s ability to continue as a going concern at September 30, 2014.

Management has implemented its business plan to add new products, increase marketing activities and, as a result, increase revenue. Our ability to continue to implement our current business plan and continue as a going concern ultimately is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and to achieve profitable operations.

There can be no assurances that funds will be available to the Company when needed or, if available, that such funds will be available under favorable terms. In the event that the Company is unable to generate adequate revenues to cover expenses and cannot obtain additional funds in the near future, the Company may seek protection under bankruptcy laws.  To date, management has not considered this alternative, nor does management view it as a likely occurrence, since the Company is progressing with various potential sources of new capital and we anticipate a successful outcome from these activities. However, capital markets remain difficult and there can be no certainty of a successful outcome from these activities. 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.   

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements include the accounts of Thinspace Technology, Inc. and its wholly-owned subsidiaries, Thinspace UK and Thinspace USA. All material inter-company accounts and transactions have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

7

ACCOUNTS RECEIVABLE

Accounts receivable are reported at the customers' outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. The Company evaluates receivables on a regular basis for potential reserve.   The accounts receivable balances of $319,853 and $387,279 as of September 30, 2014 and December 31, 2013, respectively, do not include an allowance for doubtful accounts as the Company anticipates payment on all accounts within the next fiscal year. The Company routinely evaluates accounts receivable for uncollectible amounts.

REVENUE RECOGNITION

Certain volume licensing arrangements include a perpetual license for current products combined with rights to receive unspecified future versions of software products, which the Company has determined are additional software products and are therefore accounted for as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the coverage period. Arrangements that include term based licenses for current products with the right to use unspecified future versions of the software during the coverage period are also accounted for as subscriptions, with revenue recognized ratably over the coverage period.

Revenue from cloud-based services arrangements that allow for the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions with billings recorded as unearned revenue and recognized as revenue ratably over the coverage period beginning on the date the service is made available to customers.

Some volume licensing arrangements include time-based subscriptions for cloud-based services and software offerings that are accounted for as subscriptions. These arrangements are considered multiple element arrangements. However, because all elements are accounted for as subscriptions and have the same coverage period and delivery pattern, they have the same revenue recognition timing.

DEFERRED REVENUE

Deferred revenue related to support and maintenance is recorded in a manner consistent with the Company’s revenue recognition policy. The Company typically enters into one-year upgrade and maintenance contracts with its customers. The upgrade and maintenance contracts are generally paid in advance but can be billed monthly or quarterly. The Company defers such payment and recognizes revenue ratably over the contract period.

INVENTORY

The Company values its inventory at the lower of cost (first-in, first-out) or market. The Company uses estimates and judgments regarding the valuation of inventory to properly value inventory. Inventory adjustments are made for the difference between the cost of the inventory and the estimated realizable value and charged to cost of goods sold in the period in which the facts that give rise to the adjustments become known.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our short-term financial instruments, including cash, accounts receivable and accounts payable and accrued expenses consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of our notes and advances payable is based on management estimates and reasonably approximates their book value based on their terms.

Fair value measurements

ASC 820 “Fair Value Measurements and Disclosure” establishes a framework for measuring fair value and expands disclosure about fair value measurements. 

ASC 820 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes the following three levels of inputs that may be used:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

8

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  

In accordance with ASC 820, the following table represents the Company's fair value hierarchy for its financial assets and (liabilities) measured at fair value on a recurring basis as of September 30, 2014:

	Level 1		Level 2		Level 3		Total
Liabilities
Conversion and warrant derivative liabilities		-		-	$	31,240,660	$	31,240,660
Total Liabilities	$	-	$	-	$	31,240,660	$	31,240,660

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (conversion and warrant derivative liabilities) for the nine month period ended September 30, 2014.

	2014
Balance at beginning of year	$	11,268,087
Additions to derivative instruments		7,766,042
Change in fair value of derivative liabilities		15,447,215
Reclassification upon expiration of warrants		(1,892,000	)
Reclassification upon conversion of debt		(1,348,684	)
Balance at end of period	$	31,240,660

The following is a description of the valuation methodologies used for these items:

Conversion derivative liability — these instruments consist of certain of our notes, which are convertible based on a discount to the market value of our common stock. These instruments were valued using pricing models, which incorporate the Company’s stock price, volatility, U.S. risk free rate, dividend rate and estimated life.

CONCENTRATIONS OF CREDIT RISK

The Company performs ongoing credit evaluations of its customers. At September 30, 2014, one customer accounted for 10% of accounts receivable.

The Company maintains cash and cash equivalents with major financial institutions. Cash held in US bank accounts is insured up to $250,000 at each institution. Cash held in UK bank accounts is insured up to £85,000 at September 30, 2014 (approximately $138,000 at September 30, 2014) at each institution for each entity.  At times, cash balances may exceed the insured limits. The Company has not experienced any loss on these accounts.  The balances are maintained in demand accounts to minimize risk.

LOSS PER SHARE

We use ASC 260, “Earnings Per Share” for calculating the basic and diluted income (loss) per share. We compute basic income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding.

Dilutive common stock equivalents consist of shares issuable upon conversion of debt and preferred stock and the exercise of our stock warrants. There were 270,375,324 common share equivalents at September 30, 2014 and none at September 30, 2013, which have been excluded from the computation of the weighted average diluted shares.   

Dilutive common stock equivalents consist of shares issuable upon conversion of debt and preferred stock and the exercise of our stock warrants and options. In accordance with ASC 260-45-20, common stock equivalents derived from shares issuable through the exercise of our debt and warrants subject to derivative accounting are not considered in the calculation of the weighted average number of common shares outstanding because the adjustments in computing income available to common stockholders would result in a loss.  Accordingly, the diluted EPS would be computed in the same manner as basic earnings per share. 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements issued by the FASB and the SEC did not, or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

9

NOTE 3 – CONVERTIBLE NOTES PAYABLE

IBC Funds February 21, 2014 Financing

On February 21, 2014, the Company entered into a Securities Purchase Agreement with IBC Funds, LLC (“IBC Funds”) pursuant to which the Company sold to IBC Funds an 8% convertible debenture in the principal amount of $150,000. The debenture matures on the third anniversary of the date of issuance and bears interest at a rate of 8% per annum, payable semi-annually and on the maturity date. IBC Funds may convert, at any time, the outstanding principal and accrued interest on the debenture into shares of the Company’s common stock, at a conversion per share at 25% of the lowest closing bid price for the Company’s common stock during the previous 20 trading days.

IBC Funds March 21, 2014 Financing

On March 21, 2014, the Company entered into a Securities Purchase Agreement with IBC Funds pursuant to which the Company sold to IBC Funds an 8% convertible debenture in the principal amount of $50,000. The debenture matures on the third anniversary of the date of issuance and has terms substantially the same as the February 21, 2014 debenture.

Greystone March 21, 2014 Financing

On March 21, 2014, the Company entered into a Securities Purchase Agreement with Greystone Capital Partners, Inc. (“Greystone”) pursuant to which the Company sold to Greystone an 8% convertible debenture in the principal amount of $50,000.The debenture matures on the third anniversary of the date of issuance and has terms substantially the same as the February 21, 2014 debenture.

Greystone March 26, 2014 Financing

On March 26, 2014, the Company entered into a Securities Purchase Agreement with Greystone pursuant to which the Company sold to Greystone an 8% convertible debenture in the principal amount of $50,000. The debenture matures on the third anniversary of the date of issuance and has terms substantially the same as the February 21, 2014 note.

Greystone April 17, 2014 Financing

On April 17, 2014, the Company entered into a Securities Purchase Agreement with Greystone pursuant to which the Company sold to Greystone an 8% convertible debenture in the principal amount of $65,000. The debenture matures on the third anniversary of the date of issuance and bears interest a rate of 8% per annum, payable semi-annually and on the maturity date. Greystone may convert, at any time, the outstanding principal and accrued interest on the Debenture into shares of the Company’s common stock, at a conversion price per share at 40% of the lowest closing bid price for the Company’s common stock during the previous 20 trading days. The conversion price is subject to adjustment in the event of sales by the Company of common stock or securities convertible into common stock at a price per share lower than the then-effective conversion price, to such lower price, subject to certain exceptions.

IBC Funds April 17, 2014 Financing

On April 17, 2014, the Company entered into a Securities Purchase Agreement with IBC Funds pursuant to which the Company sold to IBC Funds an 8% convertible debenture in the principal amount of $100,000. The debenture matures on the third anniversary of the date of issuance and has terms substantially the same as the Greystone April 17, 2014 note.

Greystone May 29, 2014 Financing

On May 29, 2014, the Company entered into a Securities Purchase Agreement with Greystone pursuant to which the Company sold to Greystone an 8% convertible debenture in the principal amount of up to $617,500. The debenture matures on the third anniversary of the date of issuance and has terms substantially the same as the Greystone April 17, 2014 note. We have received $56,000 pursuant to this debenture.

IBC Funds May 29, 2014 Financing

On May 29, 2014, the Company entered into a Securities Purchase Agreement with IBC Funds pursuant to which the Company sold to IBC Funds an 8% convertible debenture in the principal amount of up to $617,500. The debenture matures on the third anniversary of the date of issuance and has terms substantially the same as the Greystone April 17, 2014 note. We have received a total of $200,000 pursuant to this note, $100,000 in May and $100,000 in September.

10

CP US May 29, 2014 Financing

On May 29, 2014, the Company entered into a Securities Purchase Agreement with CP US Income Group LLC (“CP US”) pursuant to which the Company sold to CP US an 8% convertible debenture in the principal amount of $265,000. The debenture matures on the third anniversary of the date of issuance and has terms substantially the same as Greystone April 17, 2014 note.

IBC Funds August 29, 2014 Financing

On August 29, 2014, the Company sold to IBC Funds a 10% promissory note in the principal amount of $130,000. On September 30, 2014, the Company issued an 8% convertible debenture in exchange for the promissory note. The debenture matures on September 30, 2015 and has terms substantially the same as the Greystone April 17, 2014 note.

The conversion features of the debentures described above contain a variable conversion rate. As a result, we have classified the conversion features as derivative liabilities in the financial statements. Upon issuance, we have recorded conversion feature liabilities of $5,959,048. The value of the conversion feature liabilities was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rates of between 0.6875 - 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of between 389% - 419%; and (4) expected lives of 1 - 3 years. The Company has allocated $1,116,000 to debt discount, to be amortized over the life of the debt, with the balance of $4,843,048 being charged to expense at issue.

During the nine months ended September 30, 2014, $233,244 of principal and $11,409 of accrued interest was converted into 6,451,870 shares of common stock. The Company has recorded expense of $167,703 and $370,646 for the three months and nine months ended September 30, 2014, respectively, related to the change in fair value of the conversion feature through the dates of conversion.

NOTE 4 – DERIVATIVE LIABILITIES

The Company has identified certain embedded derivatives related to its convertible debentures, convertible preferred stock, common stock purchase warrants and a debt purchase agreement. Since certain of the debentures, the preferred stock and the debt settlement agreement are convertible into a variable number of shares, the conversion features of those debentures are recorded as derivative liabilities. Since the warrants have a price reset feature, they are recorded as derivative liabilities. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to adjust to fair value as of each subsequent balance sheet date. 

Convertible Debentures and Debt Settlement Agreement

At September 30, 2014, we recalculated the fair value of the embedded conversion feature of our notes and debt settlement agreement subject to derivative accounting and have determined that their fair value at September 30, 2014 was $23,519,781. The value of the conversion liabilities was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 0.122 - 0.6875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of between 200% - 210% and (4) an expected life of 1 - 2.66 years. We recorded expense of $11,711,200 and $10,045,269 during the three and nine months ended September 30, 2014, respectively, related to the change in fair value. 

During the nine months ended September 30, 2014 we recorded additions to our derivative conversion liabilities related to the conversion feature attributable to interest accrued during the period. These additions aggregated $359,189 and $773,630 for the three and nine months ended September 30, 2014, which has been charged to interest expense.

Convertible Preferred Stock

The conversion feature of our Series B preferred stock has been adjusted due to the subsequent issuance of debt. As a result, the conversion price is now $0.05 per share or an aggregate of 1,500,000 shares of the Company’s common stock. The Company has recorded income of $98 for the three months ended March 31, 2014, related to the change in fair value of the conversion feature of the preferred stock through the date of adjustment. The Company has also recorded an expense of $74,977 for the three months ended March 31, 2014 due to the increase in the fair value of the conversion feature as a result of the modification.

At September 30, 2014, we recalculated the fair value of the embedded conversion feature of our Series B and Series C preferred stock subject to derivative accounting and have determined that the fair value at September 30, 2014 was $7,031,986. The value of the conversion liabilities was determined using the Black-Scholes method based on the following weighted average assumptions:  (1) risk free interest rate of 0.159%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 202% and (4) an expected life of 1.08 years. We recorded expense of $4,408,933 and $4,293,420 during the three and nine months ended September 30, 2014, respectively, related to the change in fair value. 

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Warrant Liabilities

The warrants with price reset features have been adjusted due to the subsequent issuance of convertible debt. As a result, those warrants totaled 8,700,000 with an exercise price of $0.05. The Company has recorded income of $21,915 for the three months ended March 31, 2014 related to the change in fair value of the warrants through the date of adjustment. The Company has also recorded an expense of $958,388 for the three months ended March 31, 2014 due to the increase in the fair value of the warrants as a result of the modifications.

During the three months ended June 30, 2014 an aggregate of 4,700,000 warrants expired. The Company has recorded income of $1,258,643 for the nine months ended September 30, 2014 related to the change in fair value of the warrants through the dates of expiration. At expiration the Company has reclassified an aggregate of $1,892,000 of derivative liability to equity.

At September 30, 2014, we recalculated the fair value of the remaining warrants containing a price reset feature subject to derivative accounting and have determined that the fair value at September 30, 2014 was $688,893. The value of the warrant liabilities was determined using the Black-Scholes method based on the following weighted average assumptions:  (1) risk free interest rate of 0.01%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 287% and (4) an expected life of 0.09 years. We recorded expense of $268,586 and $2,018,536 during the three and nine months ended September 30, 2014, respectively, related to the change in fair value. 

NOTE 5 – LOANS PAYABLE – RELATED PARTY

Entities controlled by certain shareholders have provided short term working capital loans to the Company aggregating approximately $21,000 during the nine months ended September 30, 2014 which were settled in May 2014. The Company repaid approximately $119,000 of loans during the nine months ended September 30, 2014.

During May 2014 the Company settled all related party and related accrued interest through a lump sum payment. The excess of the liabilities over the payment, totaling $17,391, has been credited to paid in capital.

NOTE 6 – RELATED PARTY TRANSACTIONS

An entity owned by certain of our shareholders provided management services to the Company. Fees incurred for the three months ended September 30, 2014 and 2013 were $0 and $81,288, respectively. Fees incurred for the nine months ended September 30, 2014 and 2013 were $0 and $233,470, respectively.

NOTE 7 – STOCKHOLDERS’ EQUITY

Preferred Stock

The Company is authorized to issue 50,000,000 shares of preferred stock, with par value of $0.001 per share, of which 75,000 shares have been designated as Series B 10% Convertible preferred stock, and 672,000 shares have been designated as Series C Convertible preferred stock. There were 75,000 Series B shares and 672,000 Series C shares issued and outstanding as of September 30, 2014 and December 31, 2013.

Common Stock

The Company is authorized to issue 500,000,000 shares of common stock, with par value of $0.001 per share. As of September 30, 2014 and December 31, 2013, there were 96,883,942 and 82,819,694 shares of common stock issued and outstanding, respectively.

During January 2014 we issued 5,000,000 shares of common stock, valued at $1,250,000, pursuant to a consulting agreement with a one year term. We will expense the value of the shares over 2014. During the three and nine months ended September 30, 2014, we recorded expense of $312,500 and $937,500, respectively.

During January 2014 we cancelled 250,000 shares of common stock which had been issued in July of 2012 as payment for consulting services, pursuant to the request of the consultant.

During the nine months ended September 30, 2014, we issued 6,451,870 shares of common stock upon the conversion of $233,244 of note principal and $11,409 of accrued interest.

Effective April 15, 2014 and April 30, 2014 we issued an aggregate of 277,354 shares of common stock to our former President as payment of accrued salary in the amount of $30,000. Such shares were issued pursuant to terms contained in his employment agreement. The shares had a value of $76,891.

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During the nine months ended September 30, 2014 we issued an aggregate of 2,360,024 shares of common stock, valued at $475,603, for services.

During the nine months ended September 30, 2014 we issued 25,000 shares of common stock, valued at $20,500, as payment for a domain name.

During the nine months ended September 30, 2014 we issued a stock grant to an employee in the amount of 200,000 shares of common stock, valued at $34,000. The grant vests upon the two year anniversary, on May 29, 2016. The expense will be recorded over that two year period. We have recorded an expense of $4,250 and $5,667 for the three and nine month periods ended September 30, 2014, respectively.

Options Outstanding

During May 2014 we granted an aggregate of 5,000,000 common stock options to an employee. The options will vest ratably over three years commencing on the grant date and vesting on each one year anniversary, 1,000,000 on May 29, 2015 and 2,000,000 on May 29, 2016 and 2017. The options have an exercise price of $0.17 per share and a term of five years. These options have a weighted average grant date fair value of $0.15 per option, determined using the Black-Scholes method based on the following weighted average assumptions: (1) risk free interest rate of 0.52%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 293%; and (4) an expected life of the options of 2.2 years. We have recorded an expense for the employee options of $97,856 and $130,479 for the three and nine months ended September 30, 2014.

Warrants Outstanding

At September 30, 2014 we have an aggregate of 4,000,000 common stock purchase warrants outstanding and exercisable. The warrants currently have an exercise price of $0.05 per share. The warrants expire on October 6, 2014 and November 10, 2014 and have a weighted average remaining life of 0.09 years at September 30, 2014. The warrants contain a price-reset feature and are accounted for as derivative liabilities.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

LEASE

We currently occupy office space pursuant to various short term leases expiring in 2014.

Rent expense for the three months ended September 30, 2014 and 2013 was $26,178 and $57,886, respectively. Rent expense for the nine months ended September 30, 2014 and 2013 was $88,604 and $123,444, respectively.

LITIGATION

From time to time, The Company and its subsidiaries may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.  However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company and its subsidiaries are currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.  

NOTE 9 – SUBSEQUENT EVENTS

Common Shares Issued

During November 2014, we issued 14,594 shares of common stock, valued at $2,189, for services.

During November 2014, we issued 2,500,000 shares of common stock upon the conversion of notes payable in the amount of $78,125.

IBC Holdings Secured Notes  

On October 8, 2014, we entered into and closed a note purchase agreement (the “Firmware NPA”) with IBC Equity Holdings, Inc. (“IBC Holdings”), pursuant to which the Company sold to IBC Holdings a secured promissory note (the “Firmware Note”) in the principal amount of $300,000, for a purchase price of $300,000. IBC Holdings is an existing shareholder of and lender to the Company. The Firmware Note matures on October 8, 2015 and does not bear interest.

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Pursuant to the Firmware NPA, the Company agreed to pay to IBC Holdings, commencing on October 8, 2014 and continuing in perpetuity thereafter, a variable per unit amount with respect to the sale of individual hardware devices (“Revenue Sharing Units”) containing our proprietary persistent memory, program code and resident data thereon which together provide the control program for the Company’s hardware devices (the “Firmware”). The Company also granted to IBC Holdings, for a period commencing October 8, 2014 until the Firmware Note is no longer outstanding, an option to purchase the Firmware for a purchase price of $1 (the “Firmware Purchase Option”). Any exercise by IBC Holdings of the Firmware Purchase Option will act as repayment of the Firmware Note.

Pursuant to a security agreement entered into between the Company and IBC Holdings (the “Firmware Security Agreement”), the Company’s obligations under the Firmware NPA and the Firmware Note are secured by a security interest in the Firmware.

On October 8, 2014, the Company entered into and closed an additional note purchase agreement (the “VAR NPA”) with IBC Holdings, pursuant to which the Company sold to IBC Holdings a secured promissory note (the “VAR Note”) in the principal amount of $100,000, for a purchase price of $100,000. The VAR Note matures on October 8, 2015 and does not bear interest.

Pursuant to the VAR NPA, the Company agreed to pay to IBC Holdings, commencing on October 8, 2014 and continuing in perpetuity thereafter, 20% of the gross margin proceeds of the sales of third party products (the “VAR Business”). The Company also granted to IBC Holdings, for a period commencing October 8, 2014 until the VAR Note is no longer outstanding, an option to purchase the assets used in the VAR Business for a purchase price of $1 (the “VAR Purchase Option”). Any exercise by IBC Holdings of the VAR Purchase Option will act as repayment of the VAR Note.

Pursuant to a security agreement entered into between the Company and IBC Holdings (the “VAR Security Agreement”), the Company’s obligations under the VAR NPA and the VAR Note are secured by a security interest in the Company’s assets used in the VAR Business.

Pursuant to a rider to the Firmware Security Agreement and the VAR Security Agreement (the “Security Agreement Rider”), any UCC-1 financing statements filed pursuant to the Firmware Security Agreement or VAR Security Agreement will be terminated at such time as the payments made to IBC pursuant to the above agreements aggregate $1,000,000.

The foregoing descriptions of the Firmware NPA, Firmware Note, Firmware Security Agreement, VAR NPA, VAR Note, VAR Security Agreement, and Security Agreement Rider are summaries of the documents which have been filed as exhibits to a Current Report on Form 8-K filed with the SEC on October 15, 2014.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Thinspace Technology, Inc. (the “Company”, “Thinspace”, “we”, “us”, or “our”) is a cloud computing company that develops software productivity solutions that allow its customers secure access to centrally managed desktop or software applications and to work and collaborate from anywhere, accessing enterprise apps and data on any of the latest devices, as easily as they would in their own office- simply and securely. 

Thinspace Technology cloud computing solutions help IT and service providers build both private and public clouds, leveraging virtualization and networking technologies to deliver high-performance, elastic and cost-effective services for mobile workstyles.

Thinspace Technology products have been designed to suit the needs of all sizes of organizations from 5 to 50,000+ users. Customers have found our products to be easier to use, faster to implement and cheaper to maintain than other similar software, which is important to small and medium sized companies or governmental offices as well as large enterprise organizations that are looking to reduce their IT infrastructure costs. We market and license our products directly to systems integrators, or SIs, in addition to indirectly through value-added resellers, or VARs, value-added distributors, or VADs, and original equipment manufacturers, or OEMs.

Thinspace Technology Limited (formerly known as Propalms Ltd), our wholly-owned subsidiary which we acquired on December 31, 2013 (“Thinspace UK”) is a United Kingdom corporation founded on October 11, 2001 and launched sales in July 2005.

Thinspace Technology Ltd. (formerly known as Propalms International Ltd) (“Thinspace US”) is a Nevada corporation founded on August 24, 2010 and is a wholly-owned subsidiary of Thinspace UK.

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:

Use of Estimates - These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Going Concern- The financial statements have been prepared on a going concern basis, and do not reflect any adjustments related to the uncertainty surrounding our recurring losses or accumulated deficit

Revenue Recognition - We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recognition”. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title has transferred or services have been rendered, the price is fixed and determinable and collectability is reasonably assured. Revenue is not recognized on product sales transacted on a test or pilot basis. Instead, receipts from these types of transactions offset marketing expenses.

Fair Value of Financial Instruments - Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of the Company’s derivative instruments is determined using option pricing models.  

Results of Operations

Three Months ended September 30, 2014 as compared to the Three Months ended September 30, 2013

Revenues:

Revenue was $2,322,170 for the three months ended September 30, 2014 compared to revenue of $411,606 for the three months ended September 30, 2013. Overall, our revenues increased 464% for the 2014 period as compared to the 2013 period. The increase is primarily attributable to the delivery of a large order during the 2014 period (representing approximately 76% of revenue) as well as the introduction of new products and the results of increased marketing activities.

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Cost of goods sold

Cost of goods sold as a percent of revenue was 64% and 52% for the three months ended September 30, 2014 and 2013, respectively. Cost of goods sold consists of software development, purchased hardware and software costs and shipping costs. Cost of goods sold as a percentage of revenue varies based on the various costs incurred, relative to the timing of the recognition of revenue.

Operating expense:

Operating expense increased 132% for the three months ended September 30, 2014, to $1,507,661, compared to $650,540 for the three months ended September 30, 2013. Our costs have increased as we have initiated the Thinspace US operations and increased our marketing and other activities. Included in our operating expenses for the third quarter of 2014 is $312,500 of non-cash expense for stock-based compensation related to costs associated with consultants we have engaged to assist our company in its growth efforts. This non-cash expense is being amortized over the one year life of the contract, which runs through December 31, 2014. The balance of our other operating expenses includes salaries, consulting, marketing and general overhead expenses (including approximately $109,000 in other stock-based compensation for the 2014 period).

We expect that our operating expenses will increase as our business grows and we devote additional resources towards promoting that growth, most notably reflected in anticipated increases in salaries for sales personnel and technical resources.

Other income (expense):

We had expense from the change in the fair value of our derivative liabilities of $16,556,422 during the three months ended September 30, 2014 with no comparable income or expense for the three months ended September 30, 2013. The change in the fair value of our derivative liabilities resulted primarily from the changes in our stock price and the volatility of our common stock during the reported periods. Refer to Note 4 to the financial statements for further discussion of our derivative liabilities.

We reported gain from the conversion of debt of $20,979 during the three months ended September 30, 2014, with no comparable item for the three months ended September 30, 2013. The gain on debt conversion resulted from the issuance of shares of common stock to pay off debt, based on the fair value of the shares issued as compared to the carrying value of the related debt. The closing price on the date of conversion is used to compute the actual fair market value of our common stock in determining the amount of the gain or loss.

We reported interest expense of $1,883,300 during the three months ended September 30, 2014 as compared with interest expense of $67 during the three months ended September 30, 2013. Interest expense during the 2014 period consists primarily of derivative liabilities issued during the period whose fair values exceeded the proceeds of the debt, aggregating $1,709,794. The balance of the expense for the 2014 period relates to the amortization of debt discount and interest accrued on debt.

Nine Months ended September 30, 2014 as compared to the Nine Months ended September 30, 2013

Revenues:

Revenue was $5,700,775 for the nine months ended September 30, 2014 compared to revenue of $984,135 for the nine months ended September 30, 2013. Overall, our revenues increased 479% for the 2014 period as compared to the 2013 period. The increase is primarily attributable to the delivery of a large order during the 2014 period (representing approximately 67% of revenue) as well as the introduction of new products and the results of increased marketing activities.

Cost of goods sold

Cost of goods sold as a percent of revenue was 58% and 59% for the nine months ended September 30, 2014 and 2013, respectively. Cost of goods sold consists of software development, purchased hardware and software costs and shipping costs. Cost of goods sold as a percentage of revenue varies based on the various costs incurred, relative to the timing of the recognition of revenue.

Operating expense:

Operating expense increased 263% for the nine months ended September 30, 2014, to $4,796,831, compared to $1,321,265 for the nine months ended September 30, 2013. Our costs have increased as we have initiated the Thinspace US operations and increased our marketing and other activities. Included in our operating expenses for the first nine months of 2014 is $937,500 of non-cash expense for stock- based compensation related to costs associated with consultants we have engaged to assist our company in its growth efforts. This non-cash expense is being amortized over the one year life of the contract, which runs through December 31, 2014. The balance of our other operating expenses includes salaries, consulting, marketing and general overhead expenses (including approximately $670,000 in other stock-based compensation for the 2014 period).

We expect that our operating expenses will increase as our business grows and we devote additional resources towards promoting that growth, most notably reflected in anticipated increases in salaries for sales personnel and technical resources.

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Other income (expense):

We had expense from the change in the fair value of our derivative liabilities of $15,447,215 during the nine months ended September 30, 2014 with no comparable income or expense for the nine months ended September 30, 2013. The change in the fair value of our derivative liabilities resulted primarily from the changes in our stock price and the volatility of our common stock during the reported periods. Refer to Note 4 to the financial statements for further discussion of our derivative liabilities.

We reported gain from the conversion of debt of $176,108 during the nine months ended September 30, 2014, with no comparable item for the nine months ended September 30, 2013. The gain on debt conversion resulted from the issuance of shares of common stock to pay off debt, based on the fair value of the shares issued as compared to the carrying value of the related debt. The closing price on the date of conversion is used to compute the actual fair market value of our common stock in determining the amount of the gain or loss.

We reported interest expense of $7,354,199 during the nine months ended September 30, 2014 as compared with interest income of $116 during the nine months ended September 30, 2013. Interest expense during the 2014 period consists primarily of derivative liabilities issued during the period whose fair values exceeded the proceeds of the debt, aggregating $5,616,678, and the expense associated with the price resets of certain of our derivative instruments, aggregating $1,033,365. The balance of the expense for the 2014 period relates to the amortization of debt discount and interest accrued on debt.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of September 30, 2014 we had approximately $82,000 in cash and cash equivalents and a working capital deficit of $33,421,537 (resulting primarily from derivative liabilities aggregating $31,240,660), as compared to cash and cash equivalents of approximately $341,000 and a working capital deficit of $13,312,285 at December 31, 2013. Our recent sources of operating capital have been equity and debt financings, along with advances from related parties. In December 2013 we raised $100,000 from the sale of a convertible debenture and $672,000 from the sale of preferred stock (of which $472,000 was received in January 2014). We also received proceeds from convertible and other notes aggregating $1,191,000 during the nine months ended September 30, 2014.

Net Cash Provided by Operating Activities

We used $1,716,990 of cash in our operating activities during the nine months ended September 30, 2014 compared to $73,237 provided by our operating activities for the nine months ended September 30, 2013. The increase in net cash used results primarily from an increase in net loss of $431,249 (after adjusting for non-cash expenses), an increase in inventory and prepayments and decreases in deferred revenue and accounts payable.

Net Cash Used in Investing Activities

We used $18,421 for the purchase of furniture and equipment during the nine months ended September 30, 2014, compared to $47,187 used during the nine months ended September 30, 2013.

Net Cash Provided by Financing Activities

During the nine months ended September 30, 2014, we received $472,000 from the sale of our preferred stock, $1,191,000 from the sale of notes and convertible debentures and $21,000 from stockholder advances. We repaid $86,583 of notes payable and repaid $118,670 of shareholder advances. During the nine months ended September 30, 2013 we made note repayments of $11,305 and received advances from related parties of $42,518.

IBC Funds $130,000 Financing

On August 29, 2014, the Company sold to IBC Funds, LLC (“IBC Funds”) a 10% promissory note in the principal amount of $130,000. On September 30, 2014 the Company issued an 8% convertible debenture in exchange for the promissory note. The debenture matures on the first anniversary of the date of issuance and bears an interest rate of 8% per annum, payable semi-annually and on the maturity date. IBC Funds may convert, at any time, the outstanding principal and accrued interest on the debenture into shares of the Company’s common stock, at a conversion price per share at price per share of 40% of the lowest closing bid price for the Company’s common stock during the previous 20 trading days. The conversion price is subject to adjustment in the event of sales by the Company of common stock or securities convertible into common stock at a price per share lower than the then-effective conversion price, to such lower price, subject to certain exceptions.

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We presently do not have any other available credit, bank financing or other external sources of liquidity. We will need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, we may incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.

Item 3.Quantitative and Qualitative Disclosures About Market Risk .

Not required for a smaller reporting company.

Item 4.Controls and Procedures.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's (the “SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our President and Chief Executive Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our President and Chief Executive Officer concluded that, due to the material weaknesses in our internal controls over financial reporting disclosed in the Company’s 10-K for the year ended December 31, 2013, the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and also are not effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s President and Chief Executive Officer to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are not party to any material legal proceedings and no property of the Company is subject to any material legal proceedings.

Item 1A. Risk Factors.

Not required for a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended September 30, 2014, we issued 2,400,000 shares of common stock upon the conversion of $42,060 of note principal.

During September 2014 we issued an aggregate of 60,024 shares of common stock for services.

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On August 29, 2014, the Company sold to IBC Funds a 10% promissory note in the principal amount of $130,000. On September 30, 2014 the Company issued an 8% convertible debenture in exchange for the promissory note. IBC Funds may convert, at any time, the outstanding principal and accrued interest on the debenture into shares of the Company’s common stock, at a conversion price per share at price per share of 40% of the lowest closing bid price for the Company’s common stock during the previous 20 trading days.

In connection with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactions not involving a public offering.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

No.	Description
31.1	Rule 13a-14(a)/ 15d-14(a) Certification of Principal Executive and Financial Officer
32.1	Section 1350 Certification of Principal Executive and Financial Officer
EX-101.INS	XBRL INSTANCE DOCUMENT
EX-101.SCH	XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
EX-101.CAL	XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EX-101.LAB	XBRL TAXONOMY EXTENSION LABELS LINKBASE
EX-101.PRE	XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Thinspace Technology, Inc.
Date: November  14, 2014	By:	/s/ Jay Christopher Bautista
		Jay Christopher Bautista
		Chief Executive Officer (principal executive, financial and accounting officer)

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