UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
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)
(786) 763-3830
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No
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. þ Yes o No
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).
þ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K . ¨
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 | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes þ No
As of June 30, 2014, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the last sales price of the registrant’s common stock of $0.15 was approximately $4,326,985. For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
Number of shares of common stock outstanding as of March 23, 2015 was 98,381,445.
DOCUMENTS INCORPORATED BY REFERENCE – None
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
INDEX
PART I
ITEM 1. BUSINESS
Corporate History
Thinspace Technology, Inc. was incorporated in the State of Delaware on November 22, 2006 under the name Map V Acquisition, Inc.
On April 2, 2008, the Company entered into a Share Exchange Agreement with Vanity Holding Group, Inc. (“Vanity Group”) and Vanity Group’s then shareholders whereby we acquired all of the issued and outstanding shares of the common stock of Vanity Group. Upon consummation of the acquisition, Vanity Group became a wholly-owned subsidiary of the Company. Subsequent to the completion of the reverse merger acquisition, the Company changed its name from “Map V Acquisition, Inc.” to “Vanity Events Holding, Inc.” in 2008.
On December 31, 2010, the Company entered into a share exchange agreement (“Exchange Agreement”) by and among the Company, Shogun Energy, Inc., a South Dakota corporation (“Shogun”), Shawn Knapp, the principal shareholder of Shogun (the “Principal Shareholder”) and the other shareholders of Shogun (the “Shogun Shareholders” and collectively with the Principal Shareholder, the “Shareholders”). The closing of the transaction took place on December 31, 2010. Upon the closing of the Exchange, the Company shifted its operations to focus on the business of Shogun.
On June 30, 2011 the Company, Shogun, Mr. Knapp, Roxanne Knapp and the Shareholders entered into a rescission agreement pursuant to which, upon closing, the Exchange Agreement was rescinded, any and all obligations of any party arising from such Exchange Agreement, were, in all respects, deemed to be null and void and of no further force and effect.
Beginning in 2012, management decided to evolve its business strategy from a licensing and marketing company to an e-commerce transactional business.
Pursuant to an Agreement of Merger and Reorganization dated December 31, 2013 (the “Merger Agreement”) between the Company, VAEV Merger Sub, Inc., and Thinspace Technology Ltd. (formerly known as Propalms Ltd.) (“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, representing approximately 91.6% of the outstanding shares of common stock the Company, resulting in a change in control of the Company.
Thinspace UK is a cloud computing company that develops software productivity products that allow its customers secure access to centrally managed Desktops 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.
Effective December 31, 2013, the Company’s existing officer and two of its three directors resigned, and two new directors and officers who were nominees of Propalms were appointed as directors and officers of the Company.
As a result of the foregoing, we have determined to treat the acquisition as a reverse recapitalization for accounting purposes, with Thinspace UK as the acquirer for accounting purposes. As such, the financial information, including the operating and financial results, included in this annual report on Form 10-K are that of Thinspace UK rather than that of the Company prior to the closing of the Merger Agreement.
On February 6, 2014, the Company changed its name to Thinspace Technology, Inc.
On February 27, 2014, Propalms International, Ltd., a Nevada corporation an indirect wholly owned subsidiary of the Company, changed its name to Thinspace Technology, Ltd. (“Thinspace US”).
On March 10, 2014, the Company’s wholly-owned subsidiary, Propalms Ltd., a UK registered company changed its name to Thinspace Technology Ltd.
On May 29, 2014, the Company’s two officers and two of its three directors resigned . A a new officer and two new directors were appointed.
References in this report to “Thinspace”, “Thinspace Technology”, “we,” “us,” “our” and similar words refer to the Company and its wholly-owned subsidiaries, Thinspace UK and Thinspace US, unless the context indicates otherwise, and, prior to the closing of the Merger Agreement, these terms refer to Thinspace UK and Thinspace US. References to Vanity relate to the Company prior to the closing of the Merger Agreement.
Overview
Thinspace Technology is a cloud computing company that develops software productivity solutions that allow its customers secure access to centrally managed Desktops 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.
Our 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 products have been designed to suit the needs of all sizes of organizations from 5 to 50,000+ users. Thinspace products are easier to use, faster to implement and more economical to maintain than other similar software, which is important to small and medium sized companies and 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 UK is a United Kingdom corporation founded on October 11, 2001 and launched sales in July 2005.
Thinspace US is a Nevada corporation founded on August 24, 2010 and is a wholly-owned subsidiary of Thinspace UK.
Our Products
We have developed the following integrated hardware and software products that all allow our customers secure access to centrally managed Desktops or Software Applications:
skyDesk - a simple management software solution for Microsoft remote desktop users.
skyGate – software solution that allows secure remote access to applications and data from outside of the corporate network.
skyView – provides access to applications or Windows desktops from a browser on any device, including iPad, iPhone or Android tablet or Smartphone.
skyDirect – a virtual desktop infrastructure (VDI) software solution that allows secure fast access to hosted virtual desktops.
skyPoint – A branded hardware thin client endpoint aimed for the enterprise and corporate market.
These products have been designed to suit the needs of all sizes of organizations from 5 to 50,000+ users. Our products are functionally comparable to similar products developed and sold by the market leader Citrix Systems Inc.
We sell our products directly to independent software vendors, or ISVs, and application service providers or ASPs and through our worldwide network of distributors and resellers to end users.
End users are from both the public and private sectors and typically have between 5 and 1000 desktop computers in their organization. Examples of current users by industry are:
| · Manufacturing | Toyota Group (Japan) |
| · Software Houses | McCracken Financial Software (USA) |
| · Local Government | Town of Whitby (Canada) |
| · Distribution | Hisco (USA) |
| · Health Care | Community Health of Southern Iowa (USA) |
| · Educational Establishments | University of Suffolk (USA) |
| · Legal | Lavery De Billy Avocats (Canada) |
| · Charitable organisations | Alzheimer’s Association (USA) |
| · Banking | Capitol Bank (USA) |
| · Financial | Redstone Federal Credit Union (USA) |
| ● Facilities Management | Cofely (UK) |
MARKET SIZE & TRENDS
The potential market for desktop virtualization, also known as thin client software solutions, was estimated to be $1.6 billion in 2014 and is expected to grow to $21 billion in 2018. This estimate is based on our knowledge of the market, research from ABI Research, IDC, and Gartner Research and interpretation of Microsoft’s and Citrix accounts.
Our product set has comparable functionality to Citrix. We believe our solution has greater speed and a simpler installation processes than some of our competitors. In addition, our low cost base enables us to offer ours products at a much lower competitive price than our competitors. Our maintenance cost for any potential customer is also substantially lower.
Through our network of distributors and resellers, we typically target medium size organizations with up to 1000 users. Citrix mainly target organizations with a larger number of users and consequently they are not currently a significant competitor to us.
Marketing
Our marketing plan focuses on key sales and marketing initiatives, many of which are internet based marketing strategies, which have proven results. Our objective when undertaking these marketing activities is to generate as many “web downloads” and undertake as many “on line live demos” as possible, as these tend to secure more sales conversions than any other kind of lead.
We rebranded our website, www.thinspace.com,with a new look and feel and identity which was re-designed and optimized for search engines. We have incorporated social media strategies to build awareness and drive traffic to our new site. Our products are all freely downloadable as a fully functional 30 day evaluation.
Our chosen website marketing strategies are:
| · | Website optimisation; inserting key words and phrases within our website, which when a prospect searches via various search engines, ensures that Propalms /Thinspace website is always presented to them.
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| · | Google Ad words; Pay-per-click advertising is becoming increasingly more available with web companies like Google and Overture and is very effective in driving people to the desired website. The most important issue with pay-per-click is to target the correct search phrase, include brand names and the like, but most importantly, they lead the browser through to a relevant web page and does not generate “bounce”.
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| · | Partner Sponsorship; There is a number of “Server Based Computing Industry” websites that are a valuable source of information for clients involved or interested in this kind of technology. These sites includewww.brianmadden.comwww.dabcc.com andwww.MSTerminalservices.org . We will seek to have a presence on these sites in order to raise our profile considerably amongst industry professionals.
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| · | Website Language Localisation; Translate our website into as many languages as possible in order to show a “global” presence and courtesy to clients around the world. To coincide with worldwide domain extension registrations.
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| · | Website Design; Continual refresh and update of our website to ensure maximum return visits, retain customer/prospect interest and become a valuable source of information for both our customers and prospects. |
EMARKETING
E-marketing is the “media” of today, with direct hits to the right contacts, giving us traceable leads and a return on our investment that can be measured.
| · | Emedia/ITMedia/Redmond; Many IT professionals subscribe to various industry news and sales resources. We have used a number of these resource/companies to promote our products, with proven results. They work on a “cost per lead” basis, our campaigns would usually focus around getting the prospects to download our evaluation/trial software or take an on line web demo, which is then followed up by our telesales team. |
| · | Email Blasts (E-shot); either working with our channel partners or using our own customer relationship management (or CRM) data, we can E-shot our prospects on a regular basis to promote products and communicate our message. |
DIRECT MAIL
We intend to run direct mail campaigns in conjunction with telemarketing campaigns. Direct mailers typically do not work without a follow up. We will target the following markets with direct mail campaigns:
| · | Resellers; to assist our distribution channel to grow our reseller base. |
| · | End Users; to generate end user leads across all market sectors, which we can qualify and pass to our channel for appropriate follow up and close. |
| · | ISV’s; this market is a relatively untapped market for us. Propalms TSE is a very attractive proposition for ISV’s to deliver their own applications, via server based computing, for relatively low initial outlay compared to that of our main competitors. |
| · | ASP Hosting Companies; this market is a relatively untapped market for us. Propalms TSE is a very attractive proposition for ASP Hosting companies to deliver their services, via server based computing, for relatively low initial outlay compared to that of our main competitors. |
| · | Targeting “Original Equipment Manufacturers” to promote our product to be bundled with their software or systems. This is usually done via a formal “OEM Contract”. |
TELEMARKETING
We believe telemarketing is a fundamental sales function that is imperative to ensure we are making continual in roads into new prospects. In order to be effective it is imperative that we are able to “buy in” quality contact data in order to target specific chosen sectors. We plan to target the following sectors:
| · | ISV’s |
| · | ASP Hosting Companies |
| · | OEM |
| · | End Users – target customers across all vertical sectors |
SHOWS & EVENTS
In order for us to raise our profile within our market sectors it is important for us to be present at top industry shows as well as events co-hosted by our channel partners and technology partners. It is our aim to be involved in as many of these as possible. These events include the following:
| · | Microsoft; Our main industry technology partner hosts a number of events throughout the world on an on-going basis. |
| · | Infor; One of the world’s fastest growing ISV’s host annual conferences in the US. |
| · | VMWorld; The worlds’ largest trade show focussing on the virtualisation market space. |
| · | InfoSec; Infosecurity is a series of events across the globe, and the most comprehensive convergence of information security professionals. It addresses today’s strategic and technical issues in an unrivalled education programme and showcases the most diverse range of new and innovative products and services. |
| · | Partner Events; Our channel partners hold regular and ad hoc events promoting their products and services. We intend to attend and be part of as many of these events as possible, in many cases these events would have a “Thinspace Only” focus and would target both other channel partners/resellers and end users |
PROMOTIONAL ITEMS & BROCHUREWARE
It is important for us to be able to provide our prospects with various promotional media, particularly at events and following up from other marketing activities. These items include:
| · | Product brochures and price lists. |
| · | Promotional items, such as pens, polo shirts, stress balls and other giveaways with our web address and logo on, used to keep the “Thinspace” name in front of our prospects. |
Intellectual Property
The Company owns copyright on all its current range of products as well as ownership of domain names. The Company is considering the possibility of applying for patents on some on some of its software application development as well as future hardware design.
Competition
The market for Software-based computing (“SBC”) was started by and is dominated by Citrix which developed the first SBC product. Citrix have continued to develop the product and the market from the late 1990s and have maintained their position as the major worldwide supplier.
There are now a small number of other providers who have followed Citrix into the SBC market but they do not appear to have gained any significant share. The key ones are referred to below.
| · | Jetro Technologies Limited is a privately owned company based in Israel. They have a number of distributors but to date none of our distributors have reported any activity amongst their customers and prospective customers. |
| · | Ericom Software Limited is a publicly owned company based in Israel. They have recently developed a SBC software solution and as of now have not made any significant sales. |
| · | Hopto Inc based in California is a publicly traded company. They used to focus on selling their solution in the Unix market, to a very select group of customers. They have now changed direction in developing applications for mobile devices |
| · | Provision Networks Inc, based in U.S.A. They have recently been purchased by QUEST Software for an undisclosed amount. |
| · | Microsoft’s 2003, 2008 & 2012 Terminal Services Edition offers a thin client solution that can be sold in its own right and is most suitable for organizations with 5 to10 users running a single server. |
Customers
During the year ended December 31, 2014 one customer, accounted for approximately 65% of our net revenues.
Research and Development
During the year ended December 31, 2014, we spent an estimated $500,000 on research and development costs. Our research and development takes place in Pune, India.
Employees
As of March 23, 2015 the Company employs a total of 5 full-time employees.
ITEM 1A. RISK FACTORS
An investment in the Company’s common stock involves a high degree of risk. In determining whether to purchase the Company’s common stock, an investor should carefully consider all of the risks described below, together with the other information contained in this report before making a decision to purchase the Company’s securities. An investor should only purchase the Company’s securities if he or she can afford to suffer the loss of his or her entire investment.
Risks Related to Our Business
Because we have a limited operating history, our ability to fully and successfully develop our business is unknown.
Our ability to successfully develop our products, and to realize consistent, meaningful revenues and profit has not been established and cannot be assured. For us to achieve success, our products must receive broad market acceptance by consumers. Without this market acceptance, we will not be able to generate sufficient revenue to continue our business operation. If our products are not widely accepted by the market, our business may fail. Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to generate revenues, manage development costs and expenses, and compete successfully with our direct and indirect competitors.
Based upon current plans, we expect to incur operating losses in future periods. This will happen because there are expenses associated with the development, production, marketing, and sales of our product. As a result, we may not generate significant revenues in the future. Failure to generate significant revenues in near future may cause us to suspend or cease activities.
We will need additional funds to produce, market, and distribute our products.
We will have to spend additional funds to produce, market and distribute our products. If we cannot raise sufficient capital, we may have to cease operations.
There is no guarantee that we will achieve sufficient sale levels.
There is no guarantee that the expenditure of money on distribution and marketing efforts will translate into sales or sufficient sales to cover our expenses and result in profits.
Our development, marketing, and sales activities are limited by our size.
Because we are small and do not have much capital, we must limit our product development, marketing, and sales activities. As such we may not be able to complete our production and business development program and this will have a material adverse effect on the Company’s business, financial condition and results of operations.
Intense competition and increasing competition in the Thin Client market could hurt our business.
The market for thin clients is highly competitive. Market participants are of various sizes, with various market shares and geographical reach, some of whom have access to substantially more sources of capital. We compete generally with major companies such as Citrix, Hopto, Ericom and 2X. As a result of both direct and indirect competition, our ability to successfully distribute, market and sell our products, and to gain sufficient market share in the United States to realize profits may be limited, and our business plan may not succeed.
Unfavorable general economic conditions in the United States could negatively impact our financial performance.
Unfavorable general economic conditions, such as a recession or economic slowdown, in the United States could negatively affect the affordability of, and demand for, our products in the United States. Lower demand for our products in the United States could reduce our profitability.
Our business could be adversely impacted by conditions affecting the information technology market.
The demand for our products and services depends substantially upon the general demand for business-related computer appliances and software, which fluctuates based on numerous factors, including capital spending levels, the spending levels and growth of our current and prospective customers, and general economic conditions. Moreover, the purchase of our products and services is often discretionary and may involve a significant commitment of capital and other resources. Future economic projections for the information technology sector are uncertain and highlight an industry in transition from legacy platforms to mobile, cloud, big data and social solutions. If our current and prospective customers cut costs they may significantly reduce their information technology expenditures. Additionally, if our current and prospective customers shift their information technology spending more rapidly towards newer technologies and solutions, the demand for our products and services most aligned with legacy platforms (such as our Desktop Virtualization products) could decrease. Fluctuations in the demand for our products and services could have a material adverse effect on our business, results of operations and financial condition.
If we do not develop new products and services, integrate acquired products and services and enhance our existing products and services, our business, results of operations and financial condition could be adversely affected.
The markets for our products and services are characterized by:
| · | rapid technological change; |
| · | evolving industry standards; |
| · | fluctuations in customer demand; |
| · | changing and increasingly sophisticated customer needs; and |
| · | frequent new product and service introductions and enhancements. |
Our future success depends on our ability to continually enhance our current products and services, integrate acquired products and services, and develop and introduce new products and services that our customers choose to buy. The emerging markets for our next generation of products and services have yet to be defined. The introduction of third-party solutions embodying new technologies and the emergence of new industry standards could make our existing and future software solutions obsolete and unmarketable. If we are unable to keep pace with technological developments of third parties, expectations of the emerging markets and customer demands by introducing new products and services and enhancements, our business, results of operations and financial condition could be adversely affected. Our future success could be hindered by:
| · | delays in our introduction of new products and services; |
| · | delays in market acceptance of new products and services or new releases of our current products and services; |
| · | our failure to support services in a timely manner; |
| · | our failure to identify and address significant product quality issues; |
| · | our inability to position our and/or price our products and services to meet the market demand; |
| · | our failure to maintain relevance in the evolving marketplace; and |
| · | third party’s introduction of new products, or services or technologies that could replace, make obsolete or shorten the life cycle of our existing product and service offerings. |
We believe the demand for technology has and will continue to shift from the types of products and services we and our competitors have sold in the past to a new generation of products and services. We cannot guarantee that our products will achieve the broad market acceptance by our channel and strategic partners, customers and prospective customers necessary to generate significant revenue in the future. In addition, we cannot guarantee that we will be able to respond effectively to technological changes or new product announcements by others. If we experience material delays or sales shortfalls with respect to our new products and services or new releases of our current products and services, those delays or shortfalls could have a material adverse effect on our business, results of operations and financial condition.
In order to be successful, we must attract, engage, retain and integrate key employees, and failure to do so could have an adverse effect on our ability to manage our business.
Our success depends, in large part, on our ability to attract, engage, retain, and integrate qualified executives and other key employees throughout all areas of our business. Identifying, developing internally or hiring externally, training and retaining highly-skilled managerial, technical, sales and services, finance and marketing personnel are critical to our future, and competition for experienced employees can be intense. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash- and equity-based compensation. Failure to successfully hire executives and key employees or the loss of any executives and key employees could have a significant impact on our operations. Further, changes in our management team may be disruptive to our business, and any failure to successfully integrate key new hires or promoted employees could adversely affect our business and results of operations. Competition for qualified personnel in our industry is intense because of the limited number of people available with the necessary technical skills and understanding of products in our industry. The loss of services of any key personnel, the inability to retain and attract qualified personnel in the future or delays in hiring may harm our business and results of operations.
Our products could contain errors that could delay the release of new products or that may not be detected until after our products are shipped.
Despite significant testing by us and by current and potential customers, our products, especially new products or releases or acquired products, could contain errors. In some cases, these errors may not be discovered until after commercial shipments have been made. Errors in our products could delay the development or release of new products and could adversely affect market acceptance of our products. Additionally, our products depend on third-party products, which could contain defects and could reduce the performance of our products or render them useless. Because our products are often used in mission-critical applications, errors in our products or the products of third parties upon which our products rely could give rise to warranty or other claims by our customers, which may have a material adverse effect on our business, financial condition and results of operations.
We rely on indirect distribution channels and major distributors that we do not control.
We rely significantly on independent distributors and resellers to market and distribute our products and appliances. We maintain and periodically revise our sales incentive programs for our independent distributors and resellers, and such program revisions may adversely impact our results of operations. Our competitors may in some cases be effective in providing incentives to current or potential distributors and resellers to favor their products or to prevent or reduce sales of our products. The loss of or reduction in sales to our distributors or resellers could materially reduce our revenues. Further, we could maintain individually significant accounts receivable balances with certain distributors. The financial condition of our distributors could deteriorate and distributors could significantly delay or default on their payment obligations. Any significant delays, defaults or terminations could have a material adverse effect on our business, results of operations and financial condition.
Our Thin Client business could suffer if there are any interruptions or delays in the supply of hardware or hardware components from our third-party sources.
We rely on a concentrated number of third-party suppliers, who provide hardware or hardware components for our Thin Client products, and contract manufacturers. If we are required to change suppliers, there could be a delay in the supply of our hardware or hardware components and our ability to meet the demands of our customers could be adversely affected, which could cause the loss of a significant amount of sales and existing or potential customers and delayed revenue recognition and adversely affect our results of operations. While we have not, to date, experienced any material difficulties or delays in the manufacture and assembly of our Thin Client products, our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, or the need to implement costly or time-consuming protocols to comply with applicable regulations (including regulations related to conflict minerals), equipment malfunction, natural disasters and environmental factors, any of which could delay or impede their ability to meet our demand.
If operating margins and gross margins decline, our future operating results could be adversely affected.
Our operating margins in our new initiatives may be lower than those we have achieved in our more mature products and services markets, and our new initiatives may not generate sufficient revenue to recoup our investments in them. We may experience a decline in gross margin as the mix of our revenue may include more products with a hardware component and increased sales of our services, both of which have a higher cost than our software products. If we are not able to recoup our investment by normalizing our margins or reducing our costs through integration of new initiatives it could adversely affect our business, results of operations and financial condition.
Actual or perceived security vulnerabilities in our products and services or cyberattacks on our networks could have a material adverse impact on our business and results of operations.
Use of our products and services may involve the transmission and/or storage of data, including in certain instances customers' business and personally identifiable information. Thus, maintaining the security of products, computer networks and data storage resources is important as security breaches could result in product or service vulnerabilities and loss of and/or unauthorized access to confidential information. We devote significant resources to addressing security vulnerabilities in our products and services through our efforts to engineer more secure products and services, enhance security and reliability features in our products and services, deploy security updates to address security vulnerabilities and seeking to respond to known security incidents in sufficient time to minimize any potential adverse impact. Generally speaking, unauthorized parties may attempt to misappropriate or compromise our confidential information or that of third parties, create system disruptions, product or service vulnerabilities or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our products and services, our networks or otherwise exploit any security vulnerabilities of our products, services and networks. Because techniques used by these perpetrators to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until long after being launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We can make no assurance that we will be able to detect, prevent, timely and adequately address, or mitigate the negative effects of cyberattacks or other security breaches.
A breach of our security measures as a result of third-party action, malware, employee error, malfeasance or otherwise could result in (among other consequences):
| • | harm to our reputation or brand, which could lead some customers to seek to cancel subscriptions, stop using certain of our products or services, reduce or delay future purchases of our products or services, or use competing products or services; |
| • | individual and/or class action lawsuits, which could result in financial judgments against us or the payment of settlement amounts, which would cause us to incur legal fees and costs; |
| • | state or federal enforcement action, which could result in fines and/or penalties or other sanctions and which would cause us to incur legal fees and costs; and/or |
| • | in the event that we or one of our customers were the victim of a cyberattack or other security breach, additional costs associated with responding to such breach, such as investigative and remediation costs, and the costs of providing data owners or others with notice of the breach, legal fees, the costs of any additional fraud detection activities required by such customers' credit card issuers, and costs incurred by credit card issuers associated with the compromise and additional monitoring of systems for further fraudulent activity. |
Any of these actions could materially adversely impact our business and results of operations.
Our Software Application products are an alternative to the traditional way of managing desktops, and various factors could cause this line of products and services to result in slower revenue growth than we have historically experienced.
The success of our Software Application products depends in part on organizations and customers perceiving technological and operational benefits and cost savings associated with adopting desktop and application virtualization solutions. Although we have experienced success with this platform, some customers may experience challenges in implementing desktop and application virtualization due to complexity as they may create complex deployments. In addition, our primary competition in desktop and application virtualization is the existing IT practice of managing physical desktops as devices, and the success of our Desktop and Application Virtualization products may depend on information technology executives' continuing to rethink how desktops can be delivered more effectively and efficiently. To the extent that there is slower adoption of desktop and application virtualization solutions, the revenue growth associated with our Software Application products may be slower than we have historically experienced, which could adversely affect our business, results of operations and financial condition.
We anticipate that sales of our Thin Client and Software Application products and related enhancements and upgrades will constitute a majority of our revenue for the foreseeable future. Declines and variability in demand for our Thin Client and Software Application products could occur as a result of:
• new competitive product releases and updates to existing products;
• industry trend to focus on the delivery of applications especially on mobile devices;
• introduction of potential disruptive technology by third parties;
• termination of our product offerings and enhancements;
• potential market saturation;
• technological change;
• general economic conditions;
• complexities and cost in implementation;
• failure to deliver satisfactory technical support;
• dissatisfied customers; or
• lack of success of entities with which we have a technology relationship.
In addition, there continues to be an increase to the number of alternatives to Windows operating system powered desktops, in particular mobile devices such as smartphones and tablet computers. Users may increasingly turn to these devices to perform functions that would have been traditionally performed by desktops and laptops, which in turn may reduce the market for our Desktop and Application Virtualization products.
If our customers do not continue to purchase our Thin Client and Software Application products as a result of these or other factors, our revenue would decrease and our results of operations and financial condition would be adversely affected. In addition, modification or termination of certain of our Thin Client and Software Application products may cause variability in our revenue and make it difficult to predict our revenue growth and trends in our Thin Client and Software Application products as our customers adjust their purchasing decisions in response to such events.
Risks Related to the Company’s Common Stock
Because our common stock is not listed on any national securities exchange, investors may find it difficult to buy and sell our shares.
Our common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and sell our shares than if our common stock was traded on an exchange. Although our common stock is traded on the OTCQB it is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the NASDAQ Capital Market or other national securities exchange. These factors may have an adverse impact on the trading and price of our common stock.
Our common stock is currently deemed a “penny stock,” which makes it more difficult for our investors to sell their shares.
Our common stock is subject to the “penny stock” rules adopted by the Securities and Exchange Commission. These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
The rights of the holders of common stock have been impaired by the issuance of preferred stock and may be further impaired by the potential future issuance of preferred stock.
Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors has the authority to issue up to 50,000,000 shares of our preferred stock, of which 500,000 shares have been designated Series A Preferred Stock, none of which are issued and outstanding, 75,000 shares are designed as Series B Preferred Stock, all of which are issued and outstanding, and 672,000 shares have been designated as Series C Preferred Stock, all of which are issued and outstanding.
Furthermore, our board of directors has the right, without stockholder approval, to issue additional preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock, which could be issued with the right to more than one vote per share, and could be utilized as a method of discouraging, delaying or preventing a change of control. The possible negative impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any additional shares of preferred stock or to create any additional series of preferred stock, we may issue such shares in the future.
As an issuer of “penny stock,” the protection provided by the federal securities laws relating to forward-looking statements does not apply to the Company.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
The Company has not paid dividends in the past and does not expect to pay dividends in the foreseeable future. Any return on investment may be limited to the value of the Company’s common stock.
No cash dividends have been paid on the Company’s common stock. We expect that any income received from operations will be devoted to our future operations and growth. The Company does not expect to pay cash dividends in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as the Company’s board of directors may consider relevant. If the Company does not pay dividends, the Company’s common stock may be less valuable because a return on an investor’s investment will only occur if the Company’s stock price appreciates.
Our management controls the majority of our outstanding voting securities.
Our officers and directors control the majority of our voting securities. Therefore, our management will control the outcome of all corporate actions and decisions for an indefinite period of time including election of directors, amendment of charter documents and approval of mergers and other significant corporate transactions.
As a result of the continuously adjustable conversion price feature of our convertible debt, our obligation to issue shares of common stock upon conversion of the debt is limitless, which will cause dilution to our existing stockholders.
As of the date of the filing of this report, we have total outstanding convertible debt in the principal amount of $2,585,931, convertible into common stock at varying discounts to the market price of our common stock. Our obligation to issue shares upon conversion of our convertible debt is essentially limitless. The number of shares of common stock issuable upon conversion of our convertible debt will increase if the market price of our stock declines, which will cause dilution to our existing stockholders.
The continuously adjustable conversion price feature of our convertible debt may encourage investors to make short sales in our common stock, which could have a depressive effective on the price of our common stock, and make it more difficult for us to raise additional funds.
The downward pressure on the price of the common stock as holders of our convertible debt convert and sell material amounts of common stock could encourage short sales by investors. Short sales by investors could place further downward pressure on the price of the common stock. The holders of our convertible debt could sell common stock into the market in anticipation of covering the short sale by converting their securities, which could cause the further downward pressure on the stock price. In addition, not only the sale of shares issued upon conversion of convertible debt, but also the mere perception that these sales could occur, may adversely affect the market price of the common stock. Downward pressure on the price of our common stock from consecutive conversions could result in the investors receiving payment on the debt at successively lower conversion rates, thereby causing a successively greater dilution of our stockholders, and causing a downward spiraling effect on the price of our stock (a so-called “death spiral”). A lower price of our stock would make it more difficult for us to raise additional funds.
FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K may be “forward-looking statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above under “Risk Factors,” and under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report and in other documents which we file with the Securities and Exchange Commission. In addition, such statements could be affected by risks and uncertainties related to our ability to raise any financing which we may require for our operations, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this annual report, except as required under applicable securities laws.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not required for a smaller reporting company.
ITEM 2. PROPERTIES
Ourcorporate offices are located at 12555 Orange Drive, Suite 216, Davie, Florida 33331. We lease 100 square feet of space for $567 per month. The lease expires on December 31, 2015.
Our U.S. head office is located at 5535 South Williams Blvd, Suite 751, Port Orange, Florida 32128. We lease 2,300 sq feet for $2,500 per month. The lease expires on March 1, 2016. We terminated the lease as of 3/31/15.
Our U.S. sales office is located at 100 Crescent Court, Suite 7015, Dallas Texas 75201. We lease 84 square feet of space for $799 per month. The lease expires on July 31, 2015.
Our international administrative offices are located at The Catalyst @ University of York, Baird Lane, York YO10 5GA, North Yorkshire, UK. We lease 900 square feet for $2,640 per month.
We believe that our existing facilities are suitable and adequate to meet our current business requirements.
ITEM 3. 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 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock quoted on the OTCQB under the symbol “THNS.”
The following table sets forth, for the periods indicated, the range of high and low intraday closing bid information per share of our common stock.
| | | High | | | Low | |
| Quarter ended 03/31/13 | | $ | 2.75 | | | $ | 1.19 | |
| Quarter ended 06/30/13 | | $ | 2.09 | | | $ | 0.41 | |
| Quarter ended 09/30/13 | | $ | 1.55 | | | $ | 0.30 | |
| Quarter ended 12/31/13 | | $ | 0.36 | | | $ | 0.16 | |
| Quarter ended 03/31/14 | | $ | 0.20 | | | $ | 0.92 | |
| Quarter ended 06/30/14 | | $ | 0.15 | | | $ | 0.70 | |
| Quarter ended 09/30/14 | | $ | 0.03 | | | $ | 0.22 | |
| Quarter ended 12/31/14 | | $ | 0.12 | | | $ | 0.20 | |
The above prices are believed to reflect representative inter-dealer quotations, without retail markup, markdown or other fees or commissions, and may not represent actual transactions.
As of March 23, 2015, there were approximately 77 holders of record of the Company’s common stock.
Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
None.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Not required for a smaller reporting company..
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
Thinspace Technology is a hardware and software cloud computing company specifically focused on desktop virtualization. Our solutions deliver and manage centralized desktop computing from a pool of shared computing resources (‘the Cloud’) to the end users. This allows our customers secure access to centrally managed Desktops 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 and 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) is a Nevada corporation (“Thinspace US”) founded on 24 August, 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 - The 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
Year ended December 31, 2014 as compared to the Eleven Months ended December 31, 2013
Revenues
We currently derive our revenues from a number of software products that allow our customers secure access to centrally managed Desktops or Software Applications:
| | skyDesk - a simple management software solution for Microsoft remote desktop users. |
| | skyGate – software solution that allows secure remote access to applications and data from outside of the corporate network. |
| | skyView – provides access to applications or Windows desktops from a browser on any device, including iPad, iPhone or Android tablet or Smartphone. |
| | skyDirect – a virtual desktop infrastructure (VDI) software solution that allows secure fast access to hosted virtual desktops. |
| | skyPoint – A branded hardware thin client endpoint aimed for the enterprise and corporate market. |
Overall, our revenues were $6,266,895 for the year ended December 31, 2014 as compared to revenue of $1,509,286 for the eleven months ended December 31, 2013. Overall, our revenue increased 315% 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 61% of revenue) as well as the introduction of new products and the results of increased marketing activities. While we cannot be certain that we will maintain this type of growth, we are optimistic about the recurring revenue from our products.
Cost of revenue
Cost of revenue as a percent of revenue was 56% for the year ended December 31, 2014 and 46% for the eleven months ended December 31, 2013. 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 207% for the year ended December 31, 2014, to $6,152,945, compared to $2,006,939 for the eleven months ended December 31, 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 year ended December 31, 2014 is $1,250,000 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. The balance of our other operating expenses includes salaries, consulting, marketing and general overhead expenses (including approximately $774,000 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 income from the change in the fair value of our derivative liabilities of $3,084,115 during the year ended December 31, 2014 with no comparable income or expense for the 2013 period. 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 7 to the financial statements for further discussion of our derivative liabilities.
We reported gain from the conversion of debt of $328,186 during the year ended December 31, 2014, with no comparable item for the 2013 period. 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 $8,326,802 during the year ended December 31, 2014 as compared with interest expense of $306,340 for the 2013 period. 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 $6,360,649, 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. The expense for the 2013 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 December 31, 2014 we had approximately $136,000 in cash and cash equivalents and a working capital deficit of approximately $14,661,000 (resulting primarily from derivative liabilities aggregating approximately $12,174,000), as compared to cash and cash equivalents of approximately $341,000 and a working capital deficit of approximately $13,408,000 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 $1,841,000 during the year ended December 31, 2014.
Net Cash Provided by Operating Activities
We used $2,307,576 of cash in our operating activities during the year ended December 31, 2014 compared to $29,514 used by our operating activities for the eleven months ended December 31, 2013. We had an increase in net loss of $769,469 (after adjusting for non-cash expenses) and a decrease in deferred revenue.
Net Cash Used in Investing Activities
We used $18,217 for the purchase of furniture and equipment during the year ended December 31, 2014, with $36,450 used during the eleven months ended December 31, 2013.
Net Cash Provided by Financing Activities
During the year ended December 31, 2014, we received $472,000 from the sale of our preferred stock, $1,841,000 from the sale of notes and convertible debentures and $21,000 from stockholder advances. We repaid $90,263 of notes payable and repaid $117,270 of shareholder advances. During the eleven months ended December 31, 2013 we received $200,000 from the sale of our preferred stock and $100,000 from the sale of a convertible debenture. We received $9,848 pursuant to our recapitalization and also received net advances from related parties of $111,691. We repaid $12,748 of a note payable.
Financing Activities –
We presently do not have any available credit, bank financing or other external sources of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding. We estimate that we will need additional capital of $2,000,000 for the 2015 fiscal year.
We will still 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, it is possible that we could 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.
Our continuation as a going concern for a period longer than the current fiscal year is dependent upon our ability to obtain necessary additional funds to continue operations and expansion of our business, to determine the existence, discovery and successful exploitation of potential revenue sources that will be financed primarily through available working capital, the sales of securities and convertible debt, issuance of notes payable other debt or a combination thereof, depending upon the transaction size, market conditions and other factors.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
| | | | |
| | | Page | |
| Report of Independent Registered Public Accounting Firm | | F2 | |
| Consolidated Balance Sheets as of December 31, 2014 and December 31, , 2013 | | F-3 | |
| Consolidated Statements of Operations for the year ended December 31, 2014 and eleven month period ended December 31, 2013 | | F-4 | |
| Consolidated Statements of Changes in Stockholders' Deficit for the year ended December 31, 2014 and the eleven month period ended December 31, 2013 | | F-5 | |
| Consolidated Statements of Cash Flows for the year ended December 31, 2014 and the eleven month period ended December 31, 2013 | | F-6 | |
| Notes to Consolidated Financial Statements | | F-7 to F-19 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Thinspace Technology, Inc.
We have audited the accompanying balance sheets of Thinspace Technology, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. Thinspace Technology, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thinspace Technology, Inc. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has negative working capital and accumulated stockholders’ deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Bedinger & Company
Concord, California
March 25, 2015
THINSPACE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
| | | December 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| | | | | | | | | |
| Assets | | | | | | | | |
| | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 135,965 | | | $ | 341,031 | |
| Receivable from sale of preferred stock | | | - | | | | 472,000 | |
| Accounts receivable | | | 158,329 | | | | 291,728 | |
| Inventory | | | 100,637 | | | | 4,634 | |
| Prepaid expenses and other current assets | | | 17,058 | | | | 36,263 | |
| | | | | | | | | |
| Total current assets | | | 411,989 | | | | 1,145,656 | |
| | | | | | | | | |
| Fixed assets, net of accumulated depreciation of $73,396 and $60,312, respectively | | | 31,272 | | | | 31,325 | |
| Intangible assets, net of accumulated amortization of $489,221 and $454,416, respectively | | | 142,799 | | | | 194,743 | |
| Other assets | | | 104,683 | | | | 98,600 | |
| | | | | | | | | |
| Total assets | | $ | 690,743 | | | $ | 1,470,324 | |
| | | | | | | | | |
| Liabilities and stockholders' deficit | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 1,627,641 | | | $ | 1,610,753 | |
| Income taxes payable | | | 29,000 | | | | - | |
| Deferred revenue | | | 773,163 | | | | 1,482,504 | |
| Loans and notes payable, current portion | | | 469,400 | | | | 74,800 | |
| Loans payable - related parties | | | - | | | | 117,348 | |
| Derivative liabilities | | | 12,173,986 | | | | 11,268,087 | |
| Total current liabilities | | | 15,073,190 | | | | 14,553,492 | |
| | | | | | | | | |
| Deferred revenue, long term | | | 202,826 | | | | 73,897 | |
| Convertible notes payable, net of discount of $1,247,035 and $311,806, respectively | | | 849,396 | | | | 862,019 | |
| Loans payable | | | 13,953 | | | | 25,266 | |
| | | | | | | | | |
| Total liabilities | | | 16,139,365 | | | | 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, | | | | | | | | |
| 98,381,445 and 82,819,694 shares issued and outstanding, respectively | | | 98,381 | | | | 82,820 | |
| Additional paid in capital | | | 6,890,970 | | | | - | |
| Accumulated deficit | | | (22,414,873 | ) | | | (14,093,652 | ) |
| Accumulated other comprehensive income (loss) | | | (23,847 | ) | | | (34,265 | ) |
| Total stockholders' deficit | | | (15,448,622 | ) | | | (14,044,350 | ) |
| | | | | | | | | |
| Total liabilities and stockholders' deficit | | $ | 690,743 | | | $ | 1,470,324 | |
The accompanying notes are an integral part of these consolidated financial statements.
THINSPACE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2014 AND THE ELEVEN MONTHS ENDED DECEMBER 31, 2013
| | | Year Ended | | | Eleven Months Ended | |
| | | December 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| | | | | | | | | |
| | | | | | | | | |
| Revenues | | $ | 6,266,895 | | | $ | 1,509,286 | |
| Cost of goods sold | | | 3,491,670 | | | | 695,105 | |
| | | | | | | | | |
| Gross profit | | | 2,775,225 | | | | 814,181 | |
| | | | | | | | | |
| Operating expense: | | | | | | | | |
| Selling, general and administrative | | | 6,071,016 | | | | 1,931,873 | |
| Depreciation and amortization | | | 81,929 | | | | 75,066 | |
| | | | | | | | | |
| Total operating expense | | | 6,152,945 | | | | 2,006,939 | |
| | | | | | | | | |
| Loss from operations | | | (3,377,720 | ) | | | (1,192,758 | ) |
| | | | | | | | | |
| Gain on change in fair value of derivative liability | | | 3,084,115 | | | | - | |
| Gain on conversion of debt | | | 328,186 | | | | - | |
| Interest (Expense) income | | | (8,326,802 | ) | | | (306,340 | ) |
| | | | | | | | | |
| Loss before provision for income taxes | | | (8,292,221 | ) | | | (1,499,098 | ) |
| | | | | | | | | |
| Provision for income taxes | | | 29,000 | | | | - | |
| | | | | | | | | |
| Net loss | | | (8,321,221 | ) | | | (1,499,098 | ) |
| Preferred dividend | | | (7,500 | ) | | | (2,363,797 | ) |
| | | | | | | | | |
| Net loss attributable to common shareholders | | $ | (8,328,721 | ) | | $ | (3,862,895 | ) |
| | | | | | | | | |
| Basic and diluted loss per share | | $ | (0.09 | ) | | $ | (0.05 | ) |
| | | | | | | | | |
| Weighted average shares outstanding, | | | | | | | | |
| Basic and diluted | | | 94,339,117 | | | | 80,207,843 | |
| | | | | | | | | |
| | | | | | | | | |
| Comprehensive income (loss): | | | | | | | | |
| | | | | | | | | |
| Net loss | | $ | (8,321,221 | ) | | $ | (1,499,098 | ) |
| Foreign currency translation adjustments | | | 10,418 | | | | (33,223 | ) |
| | | | | | | | | |
| Comprehensive loss | | $ | (8,310,803 | ) | | $ | (1,532,321 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
THINSPACE TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2014 AND THE ELEVEN MONTH PERIOD ENDED DECEMBER 31, 2013
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | Deficiency | |
| | | Preferred Stock | | | Common Stock | | | AdditionalPaid In | | | Other
Comprehensive | | | Accumulated | | | in
Stockholders' | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Income (loss) | | | Deficit | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, January 31, 2013, adjusted for recapitalization | | | - | | | $ | - | | | | 80,200,000 | | | $ | 80,200 | | | $ | (79,566 | ) | | $ | (1,042 | ) | | $ | (454,968 | ) | | $ | (455,376 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares retained by Vanity shareholders | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and effect of recapitalization | | | 75,000 | | | | 75 | | | | 2,619,694 | | | | 2,620 | | | | - | | | | - | | | | (10,464,589 | ) | | | (10,461,894 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sale of preferred stock | | | 672,000 | | | | 672 | | | | - | | | | - | | | | 671,328 | | | | - | | | | - | | | | 672,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contribution of inventory by related party | | | - | | | | - | | | | - | | | | - | | | | 97,038 | | | | - | | | | - | | | | 97,038 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deemed dividend - value of preferred derivative | | | - | | | | - | | | | - | | | | - | | | | (688,800 | ) | | | - | | | | (1,674,997 | ) | | | (2,363,797 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | 0 | | | | - | | | | - | | | | (33,223 | ) | | | (1,499,098 | ) | | | (1,532,321 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2013 | | | 747,000 | | | | 747 | | | | 82,819,694 | | | | 82,820 | | | | - | | | | (34,265 | ) | | | (14,093,652 | ) | | | (14,044,350 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for services | | | - | | | | - | | | | 7,374,618 | | | | 7,374 | | | | 1,720,728 | | | | - | | | | - | | | | 1,728,102 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock based compensation | | | - | | | | - | | | | - | | | | - | | | | 238,255 | | | | - | | | | - | | | | 238,255 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued upon conversion of debt | | | - | | | | - | | | | 12,934,779 | | | | 12,935 | | | | 2,487,957 | | | | - | | | | - | | | | 2,500,892 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted stock grant | | | - | | | | - | | | | 200,000 | | | | 200 | | | | (200 | ) | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for domain name | | | - | | | | - | | | | 25,000 | | | | 25 | | | | 20,475 | | | | - | | | | - | | | | 20,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for payment of accrued salaries | | | - | | | | - | | | | 277,354 | | | | 277 | | | | 76,614 | | | | - | | | | - | | | | 76,891 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contribution to capital | | | - | | | | - | | | | - | | | | - | | | | 17,391 | | | | - | | | | - | | | | 17,391 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares cancelled | | | - | | | | - | | | | (5,250,000 | ) | | | (5,250 | ) | | | 5,250 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative liability reclassified to equity | | | - | | | | - | | | | | | | | | | | | 2,332,000 | | | | - | | | | - | | | | 2,332,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock dividend | | | | | | | | | | | | | | | | | | | (7,500 | ) | | | | | | | | | | | (7,500 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | 10,418 | | | | (8,321,221 | ) | | | (8,310,803 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2014 | | | 747,000 | | | $ | 747 | | | | 98,381,445 | | | $ | 98,381 | | | $ | 6,890,970 | | | $ | (23,847 | ) | | $ | (22,414,873 | ) | | $ | (15,448,622 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
THINSPACE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2014 AND THE ELEVEN MONTH PERIOD ENDED DECEMBER 31, 2013
| | | Year Ended | | | Eleven Months Ended | |
| | | December 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | |
| Net loss | | $ | (8,321,221 | ) | | $ | (1,499,098 | ) |
| Adjustments to reconcile net loss to net | | | | | | | | |
| cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 81,929 | | | | 75,066 | |
| Amortization of prepaid stock based compensation | | | 1,250,000 | | | | - | |
| Stock based compensation | | | 774,287 | | | | - | |
| Gain on conversion of debt | | | (328,186 | ) | | | - | |
| Change in fair value of derivative liability | | | (3,084,115 | ) | | | - | |
| Amortization of debt discount | | | 7,733,769 | | | | 299,964 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 126,234 | | | | (198,710 | ) |
| Inventory | | | (96,003 | ) | | | 92,404 | |
| Prepaid expenses and other current assets | | | 17,194 | | | | (32,916 | ) |
| Other assets | | | (12,129 | ) | | | (33,948 | ) |
| Accounts payable and accrued expenses | | | 81,058 | | | | 275,922 | |
| Income taxes payable | | | 29,000 | | | | - | |
| Deferred revenue | | | (559,393 | ) | | | 991,802 | |
| | | | | | | | | |
| Net cash (used in) provided by operating activities | | | (2,307,576 | ) | | | (29,514 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Cash paid for fixed assets | | | (18,217 | ) | | | (36,540 | ) |
| | | | | | | | | |
| Net cash used in investing activities | | | (18,217 | ) | | | (36,540 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from sale of preferred stock | | | 472,000 | | | | 200,000 | |
| Proceeds from notes payable | | | 1,841,000 | | | | 100,000 | |
| Cash acquired in recapitalization | | | - | | | | 9,848 | |
| Repayment of note | | | (75,000 | ) | | | - | |
| Repayment of loan | | | (15,263 | ) | | | (12,748 | ) |
| Advances from related parties | | | 21,000 | | | | 121,058 | |
| Repayments to related parties | | | (117,270 | ) | | | (9,367 | ) |
| | | | | | | | | |
| Net cash provided by financing activities | | | 2,126,467 | | | | 408,791 | |
| | | | | | | | | |
| Effect of exchange rate changes on cash | | | (5,740 | ) | | | (9,305 | ) |
| | | | | | | | | |
| Net (decrease) increase in cash | | | (205,066 | ) | | | 333,432 | |
| Cash, beginning of period | | | 341,031 | | | | 7,599 | |
| Cash, end of period | | $ | 135,965 | | | $ | 341,031 | |
| | | | | | | | | |
| Supplemental Schedule of Cash Flow Information: | | | | | | | | |
| Cash paid for interest | | $ | 281,301 | | | $ | 1,111 | |
| | | | | | | | | |
| Non-cash investing and financing activities: | | | | | | | | |
| Fair value of common stock issued upon conversion of notes | | $ | 2,500,892 | | | $ | - | |
| Note payable converted to common stock | | | 443,394 | | | | - | |
| Accrued interest converted to common stock | | | 38,708 | | | | - | |
| Derivative liability reclassified to equity upon conversion of debt | | | 2,437,999 | | | | - | |
| Derivative liability reclassified to equity upon expiration of warrants | | | 2,332,000 | | | | - | |
| Derivative liability of debt issued | | | 6,793,742 | | | | 399,967 | |
| Derivative liability of conversion feature of preferred stock | | | - | | | | 2,363,797 | |
| Common stock issued as payment of prepaid consulting fees | | | 1,250,000 | | | | - | |
| Contribution of inventory | | | - | | | | 97,038 | |
The accompanying notes are an integral part of these consolidated financial statements.
THINSPACE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
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 a desktop virtualization solution suite, named skySpace, offering 5 key products:
| • | skyDesk - a simple management software solution for Microsoft remote desktop users. |
| • | skyGate – software solution that allows secure remote access to applications and data from outside of the corporate network. |
| • | skyView – provides access to applications or Windows desktops from a browser on any device, including iPad, iPhone or Android tablet or Smartphone. |
| • | skyDirect – a virtual desktop infrastructure (VDI) software solution that allows secure fast access to hosted virtual desktops. |
| • | skyPoint – A branded hardware thin client endpoint aimed for the enterprise and corporate market. |
We sell directly to independent software vendors and Application Service Providers (ASPs) and to end users through a chain of distributors and resellers. Our larger customers are predominantly large businesses based around the world, with a concentration in North America, the Far East and India.
Our operating subsidiaries are Thinspace Technology Ltd (“Thinspace UK”), organized and operating in the United Kingdom, and Thinspace Technology Ltd. (“Thinspace USA”), a Nevada corporation formed on August 24, 2010 and operating in the states of California, Colorado and Florida.
Pursuant to an Agreement of Merger and Reorganization dated December 31, 2013 between the Company, VAEV Merger Sub, Inc., and Thinspace UK, VAEV Merger Sub merged with Thinspace UK and all of the issued and outstanding shares of Thinspace UK were exchanged for 80,200,000 shares of common stock of the Company. The transaction has been accounted for as a reverse acquisition of Vanity by Thinspace UK but in substance as a capital transaction, rather than a business combination since Vanity had minimal operations and assets as of the closing of the transaction. The stockholders of Thinspace UK owned a majority of the Company’s voting power immediately following the transaction and Thinspace UK’s management assumed operational, management and governance control of the Company. The transaction is deemed as reverse recapitalization and the accounting is similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets should be recorded. Thinspace UK is treated as the surviving and continuing entity. The Company did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s historical financial statements are those of Thinspace UK and its subsidiary, Thinspace USA.
Vanity assets and liabilities retained subsequent to the transaction are as follows:
| Cash | | $ | 9,848 | |
| Other assets | | | 1,349 | |
| Accounts payable and accrued expenses | | | (1,032,603 | ) |
| Notes payable | | | (922,019 | ) |
| Derivative liabilities | | | (8,504,326 | ) |
| Net liabilities retained | | $ | (10,447,751 | ) |
We changed the fiscal year end of Thinspace UK and Thinspace USA to December 31 to match that of Vanity prior to the reverse acquisition.
References herein to “Vanity” refer to the Company prior to the reverse acquisition.
BASIS OF PRESENTATION AND GOING CONCERN
Basis of Presentation
We have incurred a net loss of $8,321,221 for the year ended December 31, 2014. As of December 31, 2014 we have negative working capital of $14,661,201 and a stockholders’ deficit of $15,448,622. As a result, there is substantial doubt about the Company’s ability to continue as a going concern at December 31, 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 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 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.
CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
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 $158,329 and $291,728 as of December 31, 2014 and 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.
LONG-LIVED ASSETS
We assess the carrying value of long-lived assets in accordance with ASC 360, "Property, Plant and Equipment". We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include, but are not limited to, the following: a significant underperformance to expected historical or projected future operating results, a significant change in the manner of the use of the acquired asset or the strategy for the overall business, or a significant negative industry or economic trend.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to operations.
The Company depreciates its property and equipment on a straight-line basis with estimated useful lives of three to four years.
INTANGIBLE ASSETS
The intangible assets of the Company are subject to amortization and are amortized using the straight-line method over their estimated period of benefit of 10 years. The Company evaluates the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
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 December 31, 2014:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Liabilities | | | | | | | | | | | | | | | | |
| Conversion and warrant derivative liabilities | | | - | | | | - | | | | 12,173,986 | | | | 12,173,986 | |
| Total Liabilities | | $ | - | | | $ | - | | | $ | 12,173,986 | | | $ | 12,173,986 | |
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 year ended December 31, 2014.
| | | 2014 | |
| Balance at beginning of year | | $ | 11,268,087 | |
| Additions to derivative instruments | | | 8,760,013 | |
| Change in fair value of derivative liabilities | | | (3,084,115 | ) |
| Reclassification upon expiration of warrants | | | (2,332,000 | ) |
| Reclassification upon conversion of debt | | | (2,437,999 | ) |
| Balance at end of period | | $ | 12,173,986 | |
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 December 31, 2014, two customers accounted for 36% or more of accounts receivable. At December 31, 2013, two customers accounted for 35% or more 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 December 31, 2014 (approximately $132,000 at December 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.
RESEARCH AND DEVELOPMENT
Expenses related to present and future products are expensed as incurred.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company’s U.K. subsidiary, Thinspace UK, are measured using the British Pound as the functional currency. Assets, liabilities and equity accounts of the company are translated at exchange rates as of the balance sheet date or historical acquisition date, depending on the nature of the account. Revenues and expenses are translated at average rates of exchange in effect throughout the year. The resulting cumulative translation adjustments have been recorded as a separate component of stockholders' equity. The financial statements are presented in United States of America dollars.
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 220,479,871 common share equivalents at December 31, 2014 and 165,140,070 at December 31, 2013, which have been excluded from the computation of the weighted average diluted shares.
INCOME TAXES
We utilize ASC 740 “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax provisions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company has made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by the guidance. As a result of this review, the Company concluded that at this time there are no uncertain tax positions that would result in tax liability to the Company.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2013 consolidated financial statements to conform to the current period presentation.
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 – PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2014 and 2013:
| | | | | | | |
| | | 2014 | | | 2013 | |
| | | | | | | | |
| Office equipment and furniture | | $ | 104,668 | | | $ | 91,637 | | |
| Accumulated depreciation | | | (73,396 | ) | | | (60,312 | ) | |
| Carrying value | | $ | 31,272 | | | $ | 31,325 | | |
| | | | | | | | | | | | | | | | |
Depreciation expense for the year ended December 31, 2014 and the eleven months ended December 31, 2013 was $17,060 and $13,602, respectively.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2014 and 2013:
| | | | | | | |
| | | 2014 | | | 2013 | |
| | | | | | | |
| Developed technology | | $ | 611,520 | | | $ | 649,159 | |
| Domain name | | | 20,500 | | | | - | |
| | | | 632,020 | | | | 649,159 | |
| Accumulated amortization | | | (489,221 | ) | | | (454,416 | ) |
| Carrying value | | $ | 142,799 | | | $ | 194,743 | |
Technology-based intangible assets included software to be sold, leased, or otherwise marketed.
Amortization expense for the year ended December 31, 2014 and the eleven months ended December 31, 2013 was $64,869 and $61,464, respectively. The Company estimates that they have no significant residual value related to the intangible assets subject to amortization. No material impairments of intangible assets were identified during any of the periods presented.
NOTE 5 – INVENTORY
Inventory at December 31, 2014 and 2013 consists of finish goods purchased hardware that is sold in connection with our software products.
During the eleven months ended December 31, 2013 we acquired inventory from a related party. We have valued this inventory at $97,038 and have recorded this amount as a contribution to capital.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
2014 Transactions
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 $450,000 pursuant to this debenture.
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 $6,793,742. 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 0.625 - 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of between 203% - 419%; and (4) expected lives of 1 - 3 years. The Company has allocated $1,366,000 to debt discount, to be amortized over the life of the debt, with the balance of $5,427,742 being charged to expense at issue.
During the year ended December 31, 2014, $443,394 of principal and $38,700 of accrued interest was converted into 12,934,779 shares of common stock. The Company has recorded income of $1,044,806 for the year ended December 31, 2014 related to the change in fair value of the conversion feature through the dates of conversion.
2013 Transactions
We were a party to a total of eighteen convertible notes aggregating an outstanding principal balance of $1,173,825 at December 31, 2013, with related accrued and unpaid interest of $209,972. Of these notes, sixteen notes, aggregating $1,073,825 of principal, are convertible at discounts to the market price of our common stock of 75% - 90%. Two notes, aggregating $100,000 principal balance, are convertible at a fixed conversion rate of $0.001 per share. The convertible notes, as amended, bear interest at a weighted average rate of 9% per year and mature in December of 2016. Debt discount of $311,806 will be amortized over the remaining lives of the related notes.
CP US Income Group LLC $100,000 Debenture
On December 31, 2013, the Company entered into a Securities Purchase Agreement with CP US Income Group, LLC (CP US), an accredited investor, providing for the sale by the Company to CP US of an 8% convertible debenture in the aggregate principal amount of $100,000 (such balance being included in the balance noted in the preceding paragraph). The CP US debenture matures on December 31, 2016 and bears interest a rate of 8% per annum, payable annually. The Investor may convert, at any time, the outstanding principal and accrued interest on the CP debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price that is seventy five percent (75%) discount of the low closing bid price of the Common Stock during the twenty (20) trading days immediately preceding the conversion date. The Conversion Price may be adjusted pursuant to the other terms of this Debenture.
The conversion feature of the CP US debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $399,964. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.625%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 432%; and (4) an expected life of 3 years. The Company has allocated $100,000 to debt discount, to be amortized over the life of the debt, with the balance of $299,964 being charged to expense at issue.
NOTE 7 –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.
December 31, 2014:
Convertible Debentures and Debt Settlement Agreement
At December 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 December 31, 2014 was $9,471,074. The value of the conversion liabilities was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.183% - 0.75%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of between 188% - 211% and (4) an expected life of 1 - 2.41 years. We recorded income of $2,492,643 during the year ended December 31, 2014 related to the change in fair value.
During the year ended December 31, 2014 we recorded additions to our derivative conversion liabilities related to the conversion feature attributable to interest accrued during the year. These additions aggregated $932,907 for the year ended December 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 year ended December 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 $74,976 for the year ended December 31, 2014 due to the increase in the fair value of the conversion feature as a result of the modification.
At December 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 December 31, 2014 was $2,702,912. 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 0.273%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 203% and (4) an expected life of 1.05 years. We recorded income of $35,653 during the year ended December 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 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 year ended December 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 year ended December 31, 2014 due to the increase in the fair value of the warrants as a result of the modifications.
During the year ended December 31, 2014 the 8,700,000 warrants expired. The Company has recorded expense of $511,000 for year ended December 31, 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 $2,332,000 of derivative liability to equity.
Derivative liability activity for the year ended December 31, 2014 is summarized as follows:
| | | Balance at December 31, 2013 | | | Additions | | | Modifications | | | Conversions | | | Reclassifications | | | Change in Value | | | Balance at December 31, 2014 | |
| Convertible notes, interest and debt settlement | | $ | 7,719,873 | | | $ | 7,726,649 | | | $ | - | | | $ | (2,437,999 | ) | | $ | - | | | $ | (3,537,449 | ) | | $ | 9,471,074 | |
| Convertible preferred stock | | | 2,663,687 | | | | | | | | 74,976 | | | | | | | | | | | | (35,751 | ) | | | 2,702,912 | |
| Warrant liabilities | | | 884,527 | | | | | | | | 958,388 | | | | | | | | (2,332,000 | ) | | | 489,085 | | | | - | |
| | | $ | 11,268,087 | | | $ | 7,726,649 | | | $ | 1,033,364 | | | $ | (2,437,999 | ) | | $ | (2,332,000 | ) | | $ | (3,084,115 | ) | | $ | 12,173,986 | |
December 31, 2013:
Convertible Notes and Debt Settlement Agreement
At December 31, 2013, 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 December 31, 2013 was $7,719,873. The value of the conversion liabilities was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.69%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 432% and (4) an expected life of 3 years.
Convertible Preferred Stock
At December 31, 2013, we recalculated the fair value of the embedded conversion feature of our preferred stock subject to derivative accounting and have determined that their fair value at December 31, 2013 was $2,663,687. 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 0.19%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 242% and (4) an expected life of 1.15 years.
Warrant Liabilities
At December 31, 2013, 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 December 31, 2013 was $884,527. 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 0.09%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 195% and (4) an expected life of 0.53 years.
NOTE 8 – LOANS AND NOTES PAYABLE
Loan payable consisted of the following at December 31, 2014 and 2013:
| | | | | | | |
| | | 2014 | | | 2013 | |
| | | | | | | |
| Bank loan payable | | $ | 23,353 | | | $ | 40,066 | |
| Demand loans payable | | | 60,000 | | | | 60,000 | |
| Notes payable | | | 400,000 | | | | - | |
| | | | 483,353 | | | | 100,066 | |
| Current portion | | | (469,400 | ) | | | (74,800 | ) |
| Long term portion | | $ | 13,953 | | | $ | 25,266 | |
The Company is obligated under a bank loan bearing interest at a rate of 2.2% over the bank’s base rate, maturing in 2016.
The Company is obligated under a note payable in the amount of $10,000. The note bears interest at 10% per year and matured on December 31, 2013. This note remains outstanding at December 31, 2014.
The Company has received funds from an accredited investor, as a non-interest-bearing loan, without formal loan agreements and terms. The amounts received were $50,000, and were loaned as an accommodation to the Company. These advances remain outstanding at December 31, 2014.
IBC Holdings Secured Notes
On October 8, 2014, we entered into and closed a note purchase agreement (the “Firmware NPA”) with IBC Equity Holdings, Inc. (“IBC Holdings”), pursuant to which the Company sold to IBC Holdings a secured promissory note (the “Firmware Note”) in the principal amount of $300,000, for a purchase price of $300,000. IBC Holdings is an existing shareholder of and lender to the Company. The Firmware Note matures on October 8, 2015 and does not bear interest.
Pursuant to the Firmware NPA, the Company agreed to pay to IBC Holdings, commencing on October 8, 2014 and continuing in perpetuity thereafter, a variable per unit amount with respect to the sale of individual hardware devices (“Revenue Sharing Units”) containing our proprietary persistent memory, program code and resident data thereon which together provide the control program for the Company’s hardware devices (the “Firmware”). The Company also granted to IBC Holdings, for a period commencing October 8, 2014 until the Firmware Note is no longer outstanding, an option to purchase the Firmware for a purchase price of $1 (the “Firmware Purchase Option”). Any exercise by IBC Holdings of the Firmware Purchase Option will act as repayment of the Firmware Note.
Pursuant to a security agreement entered into between the Company and IBC Holdings (the “Firmware Security Agreement”), the Company’s obligations under the Firmware NPA and the Firmware Note are secured by a security interest in the Firmware.
On October 8, 2014, the Company entered into and closed an additional note purchase agreement (the “VAR NPA”) with IBC Holdings, pursuant to which the Company sold to IBC Holdings a secured promissory note (the “VAR Note”) in the principal amount of $100,000, for a purchase price of $100,000. The VAR Note matures on October 8, 2015 and does not bear interest.
Pursuant to the VAR NPA, the Company agreed to pay to IBC Holdings, commencing on October 8, 2014 and continuing in perpetuity thereafter, 20% of the gross margin proceeds of the sales of third party products (the “VAR Business”). The Company also granted to IBC Holdings, for a period commencing October 8, 2014 until the VAR Note is no longer outstanding, an option to purchase the assets used in the VAR Business for a purchase price of $1 (the “VAR Purchase Option”). Any exercise by IBC Holdings of the VAR Purchase Option will act as repayment of the VAR Note.
Pursuant to a security agreement entered into between the Company and IBC Holdings (the “VAR Security Agreement”), the Company’s obligations under the VAR NPA and the VAR Note are secured by a security interest in the Company’s assets used in the VAR Business.
Pursuant to a rider to the Firmware Security Agreement and the VAR Security Agreement (the “Security Agreement Rider”), any UCC-1 financing statements filed pursuant to the Firmware Security Agreement or VAR Security Agreement will be terminated at such time as the payments made to IBC pursuant to the above agreements aggregate $1,000,000.
NOTE 9 – LONG TERM DEBT
Long term debt at December 31, 2014 matures as follows:
| | | | |
| Year ending December 31, 2016 | | $ | 730,431 | |
| Year ending December 31, 2017 | | | 1,366,000 | |
| | | $ | 2,096,431 | |
NOTE 10 – LOANS PAYABLE – RELATED PARTY
Entities controlled by certain shareholders have provided short term working capital loans to the Company aggregating approximately $21,000 during 2014 which were settled in May 2014. The Company repaid approximately $119,000 of loans during the year ended December 31, 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.
Short term working capital loans to the Company aggregated approximately $121,000 during the eleven months ended December 31, 2013. The loans bear a weighted average effective interest rate of 13.5%. The Company repaid approximately $9,000 in 2013.
Interest expense related to these loans of $4,062 and $5,264 has been recorded for the year ended December 31, 2014 and the eleven months ended December 31, 2013, respectively.
NOTE 11 – DEFERRED REVENUE
Deferred revenue consists of funds received in advance of services being performed. At December 31, 2014 and 2013 the deferred revenue balance consisted of the following:
| | | | | | | |
| | | 2014 | | | 2013 | |
| | | | | | | |
| Deferred revenue due within one year | | $ | 773,163 | | | $ | 1,482,504 | |
| Deferred revenue due after one year | | | 202,826 | | | | 73,897 | |
| Carrying value | | $ | 975,989 | | | $ | 1,556,401 | |
Unearned revenue comprises mainly unearned revenue from sales and licensing of software programs, and payments for products and services for which the Company has been paid in advance and we earn the revenue as we provide the service or software or otherwise meet the revenue recognition criteria.
Unearned revenue from sales and licensing of software programs represents customer billings for multi-year licensing arrangements paid either at inception of the agreement or annually at the beginning of each coverage period and accounted for as subscriptions with revenue recognized ratably over the coverage period.
NOTE 12– RELATED PARTY TRANSACTIONS
An entity owned by certain of our shareholders provided management services to the Company. Fees incurred for the year ended December 31, 2014 and the eleven months ended December 31, 2013 were $0 and $277,940, respectively.
NOTE 13 – 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, with par value of $0.001 per share, 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 December 31, 2013.
Each share of Series B Preferred Stock has a stated value equal to $1.00 per share and is initially convertible at any time into shares of the Company’s common stock at a conversion price equal to $0.60 per share or an aggregate of 125,000 shares of the Company’s common stock. The conversion price of the Series B Preferred Stock is subject to full ratchet and anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like.
Each holder of Series C Preferred Stock shall have the right to convert all (but not part) of such holder’s shares of Series C Convertible Preferred Stock such that each share of Series C Convertible Preferred Stock shall convert into that number of fully paid and non-assessable shares of Common Stock equal to the of the number of preferred shares divided by the lowest closing bid price during the twenty trading days prior to the notice of conversion multiplied by .25 (one-fourth).
We sold 672,000 shares of Series C Preferred Stock on December 31, 2013 and received proceeds of $672,000 (of which $200,000 was received on December 31, 2013 and $472,000 was received in January 2014). Because the shares are convertible at a discount to market value of our common shares, we have recorded a derivative liability for the conversion feature in the amount of $2,363,797. This amount is reflected as a deemed dividend to the preferred shareholders.
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 December 31, 2014 and 2013, there were 98,381,445 and 82,819,694 shares of common stock issued and outstanding, respectively, after giving effect to the recapitalization.
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 have expensed the value of the shares during 2014. During December the consultant voluntarily had the shares cancelled.
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 year ended December 31, 2014, we issued 12,934,779 shares of common stock upon the conversion of $443,394 of note principal and $38,700 of accrued interest.
Effective April 15, 2014 and April 30, 2014 we issued an aggregate of 277,354 shares of common stock to our former President as payment of accrued salary in the amount of $30,000. Such shares were issued pursuant to terms contained in his employment agreement. The shares had a value of $76,891.
During the year ended December 31, 2014 we issued an aggregate of 2,374,618 shares of common stock, valued at $478,103, for services.
During the year ended December 31, 2014 we issued 25,000 shares of common stock, valued at $20,500, as payment for a domain name.
During May 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 $9,917 for the year ended December 31, 2014. We have estimated that $17,000 will be recognized during 2015 and $7,083 during 2016.
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 $228,338 for the year ended December 31, 2014.
At December 31, 2014 employee options outstanding totaled 5,000,000 with an exercise price of $0.17. At December 31, 2014 these options had an intrinsic value of $0 and a remaining contractual term of 4.4 years. None are exercisable at December 31, 2014. Compensation cost related to the unvested employee options not yet recognized is $533,717 at December 31, 2014. We have estimated that $313,211 will be recognized during 2015, $173,306 during 2016 and $47,201 during 2017.
Warrants Outstanding
At December 31, 2013 we had an aggregate of 4,306,932 common stock purchase warrants outstanding and exercisable. The warrants expired on various dates between April 5, 2014 and November 10, 2014. The warrants contained a price reset feature and were accounted for as derivative liabilities.
NOTE 14 - PROVISION FOR INCOME TAXES
The Company utilizes ASC 740 “Income Taxes”, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
At December 31, 2014 and 2013, the Company had available for U.S federal income tax purposes net operating loss carryovers of approximately $1,945,000 and $529,000, respectively, which expire beginning in 2033. The net operating loss carryovers may be subject to limitations under Internal Revenue Code due to significant changes in the Company’s ownership. The Company has provided a full valuation allowance against the full amount of the net operating loss benefit, since, in the opinion of management, based upon the earnings history of the Company it is more likely than not that the benefits will not be realized.
At December 31, 2014 and 2013, the Company had available for UK income tax purposes net operating loss carryovers of approximately $1,768,000 and $1,125,000, respectively, which can be carried forward indefinitely. The Company has provided a full valuation allowance against the amount of UK unused net operating loss benefit, since management believes that, based upon the earnings history of the Company, it is more likely than not that the benefits will not be realized.
The income tax provision (benefit) consists of the following at December 31, 2014 and 2013:
| | | | | | | |
| | | 2014 | | | 2013 | |
| Federal: | | | | | | |
| Current | | $ | 25,000 | | | $ | - | |
| Deferred | | | (691,000 | ) | | | (368,000 | ) |
| | | | (666,000 | ) | | | (368,000 | ) |
| | | | | | | | | |
| State and local: | | | | | | | | |
| Current | | | 4,000 | | | | - | |
| Deferred | | | (61,000 | ) | | | (21,000 | ) |
| | | | (57,000 | ) | | | (21,000 | ) |
| | | | | | | | | |
| Change in valuation allowance | | | 723,000 | | | | 389,000 | |
| | | | | | | | | |
| Income tax provision (benefit) | | $ | - | | | $ | - | |
The provision for income taxes differ from the amount of income tax determined by applying the applicable U.S statutory rate to losses before income tax expense for the year ended December 31, 2014 and the eleven months ended December 31, 2013 as follows:
| | | | | | | | |
| | | 2014 | | | 2013 | | |
| Statutory federal income tax rate | | | (34.0 | %) | | | (34.0 | %) |
| Statutory state and local income tax rate (6%), net of federal benefit | | | (4.0 | %) | | | (4.0 | %) |
| Foreign tax rate differentials | | | 0.8 | % | | | 4.5 | % | |
| Derivative liabilities adjustments | | | 19.7 | % | | | 7.6 | % | |
| Stock compensation adjustments | | | 9.2 | % | | | - | % | |
| Change in valuation allowance | | | 8.4 | % | | | 25.9 | % | |
| Effective tax rate | | | 0.01 | % | | | 0.00 | % | |
| | | | | | | | | | | | | | |
Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following at December 31, 2014 and 2013:
| | | | | | | |
| | | | | |
| | 2014 | | 2013 | |
| | | | | |
| Deferred tax assets: | | | | | | |
| Net operating loss carry forward | | $ | 1,239,000 | | | $ | 516,000 | |
| Less: valuation allowance | | | (1,239,000 | ) | | | (516,000 | ) |
| Net deferred tax asset | | $ | - | | | $ | - | |
The Company has filed its tax returns for periods through January 31, 2013.
The provisions of ASC 740 require companies to recognize in their financial statements the impact of a tax position if that position is more likely than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
Management does not believe that the Company has any material uncertain tax positions requiring recognition or measurement in accordance with the provisions of ASC 740. Accordingly, the adoption of these provisions of ASC 740 did not have a material effect on the Company’s financial statements. The Company’s policy is to record interest and penalties on uncertain tax positions, if any, as income tax expense.
All tax years for the Company remain subject to future examinations by the applicable taxing authorities.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
LEASE
We currently occupy office space pursuant to various short term leases expiring in 2015.
Rent expense for the year ended December 31, 2014 and the eleven months ended December 31, 2013 was $98,843 and $153,507, 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 16 - SUBSEQUENT EVENTS
LG CAPITAL $137.5K FINANCING
On March 20, 2015, The “Company entered into and closed a securities purchase agreement with LG Capital Funding, LLC (“LG Capital”), pursuant to which the Company issued and sold to LG Capital an 8% convertible redeemable note in the principal amount of $137,500 (the “LG Note”) for a purchase price of $131,250. The LG Note is convertible into the Company’s common stock at a conversion price equal to 70% of the average of the 5 lowest closing prices of the common stock for the twenty prior trading days including the day upon which a notice of conversion is received by the Company. Repayment of the LG Note is due one year from the date of issuance.
ICONIC HOLDINGS $50K FINANCING
On March 23, 2015, the Company entered into and closed a securities purchase agreement with Iconic Holdings, LLC (“Iconic”), pursuant to which the Company issued and sold to Iconic a 6% convertible debenture in the principal amount of $50,000 (the “Iconic Debenture”) for a purchase price of $50,000. The Iconic Debenture is convertible into the Company’s common stock at a conversion price equal to 70% of the average of the five lowest trading prices for the common stock during the twenty trading day period ending on the last complete trading day prior to the conversion date. Repayment of the Iconic Debenture is due one year from the date of issuance.
BLACK MOUNTAIN $105K FINANCING
On March 23, 2015, the Company entered into, and on March 25, 2015, the Company closed a securities purchase agreement with Black Mountain Equities, Inc. (“Black Mountain”), pursuant to which the Company sold to Black Mountain a 10% convertible note in the principal amount of $105,000 (the “Black Mountain Note”) for a purchase price of $100,000. The Black Mountain Note is convertible into the Company’s common stock at a conversion price equal to the lesser of (a) $0.17 or (b) 70% of the average of the three lowest closing bids occurring during the twenty consecutive trading days immediately preceding the applicable conversion date. Repayment of the Black Mountain Note is due two years from the date of issuance.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's 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 Annual Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (principal executive and financial 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 Chief Executive Officer concluded that 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 Chief Executive Officer, to allow timely decisions regarding required disclosure, due to the material weaknesses in our internal control over financial reporting discussed below.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management, with the participation of our Chief Executive Officer, have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that, as of December 31, 2014, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
While we have engaged a third party accountant who is a certified public accountant to provide accounting and financial reporting services to us, we lack both an adequate number of personnel with requisite expertise in the key functional areas of finance and accounting and an adequate number of personnel to properly implement control procedures. In addition, while we have independent directors, we do not have an audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. These factors represent material weaknesses in our internal controls over financial reporting. Although we believe the possibility of errors in our financial statements is remote, and expect to continue to use a third party accountant to address shortfalls in staffing and to assist us with accounting and financial reporting responsibilities in an effort to mitigate the lack of segregation of duties, until such time as we expand our staff with qualified personnel, we expect to continue to report material weaknesses in our internal control over financial reporting.
This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in internal controls
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, OFFICERS AND CORPORATE GOVERNANCE.
Below are the names and certain information regarding the Company’s executive officers and directors. Directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers serve at the discretion of the Board of Directors.
| Name | | Position | | Age | |
| J. Christopher Bautista | | Chief Executive Officer and Director | | 44 | |
| Michael Brodsky | | Director | | 44 | |
| Scott Weiselberg | | Director | | 44 | |
Business Experience
The following is a brief account of the education and business experience during at least the past five years of each director and executive officer, indicating the person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Jay Christopher Bautista – Chief Executive Officer and DirectorMr. Bautista, has served as Chief Executive Officer and Director of the Company since May 29, 2014. From January 2011 to May 2014, Mr. Bautista served as a Principal of Infosys Limited, conducting technology and strategy consulting and systems integration. From July 2010 to January 2011, Mr. Bautista served as a Client Service Manager for Enterprise Mobile. Prior to his position at Enterprise Mobile, he served as Senior Manager at inCode Telecom, a technology and strategy consulting company, from June 2007 to September 2009. Mr. Bautista holds a Bachelor of Science from Miami University and an MBA with honors from Southern Methodist University. Mr. Baustista’s experience in executive management and as a strategic advisor gives him the qualifications and skill to serve as a director.
Michael Brodsky – Director. Mr. Brodsky has been director of the Company since February 27, 2012. Mr. Brodsky has served as president of Thalia Woods Management, Inc., a company that makes direct investments in public and private companies, since June 2009. From April 2004 to June 2009, Mr. Brodsky served as president and chief executive officer of Venture Investment Group, a company that makes direct investments in public and private companies. From February 2007 to May 2008, Mr. Brodsky served as manager in charge of worldwide logistics at Resnick Supermarket Equipment Corp. Mr. Brodsky’s experience as an investor in public and private companies gives him the qualifications and skill to serve as a director.
Scott Weiselberg – Director
Mr. Weiselberg has been director of the Company since May 29, 2014 having previously served on the Board from February 15, 2012 until December 31, 2013. Mr. Weiselberg has been a shareholder of the Kopelowitz Ostrow Firm, P.A., a law firm based in Fort Lauderdale, Florida since 2007 and a partner since March 2003. Mr. Weiselberg is a member of the Florida Bar, United States District Court for the Southern District of Florida, the Broward County Bar Association, American Bar Association, and serves as a member on several Florida Bar committees including, but not limited to, the Florida Bar’s Grievance Committee in Broward County. Mr. Weiselberg received his Bachelor of Science and Business Administration from the University of Georgia in 1992 and Juris Doctorate from Nova Southeastern University in 1997. The Company believes Mr. Weiselberg’s legal background gives him the qualifications and skill to serve as a director
Board Leadership Structure and Role in Risk Oversight
We have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined. These roles are not currently combined, with Mr. Bautista serving as Chief Executive Officer and the position of of Chairman open.
Our board of directors is primarily responsible for overseeing our risk management processes. The board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The board of directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the board’s appetite for risk. While the board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.
Involvement in Certain Legal Proceedings
To our knowledge, our directors and executive officers have not been involved in any of the following events during the past ten years:
1. any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;
4. being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
5. being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
6. being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Code of Ethics
We have not adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions because of the small number of persons involved in the management of the Company.
Board Committees
The Board of Directors acts as the Audit Committee and the Board has no separate committees. The Company has no qualified financial expert at this time because it has not been able to hire a qualified candidate. Further, the Company believes that it has inadequate financial resources at this time to hire such an expert.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers and persons who own more than 10% of the issued and outstanding shares of our common stock to file reports of initial ownership of common stock and other equity securities and subsequent changes in that ownership with the SEC. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, during the fiscal year ended December 31, 2014, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with, except as set forth below.
Michael Brodsky filed a late Form 4, as a result of which one transaction was not reported on a timely basis.
Robert Zysblat filed a late Form 4, as a result of which one transaction was not reported on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid in respect of Thinspace Technology’s principal executive officers. No other officer of Thinspace Technology received compensation in excess of $100,000 for our last two completed fiscal years.
SUMMARY COMPENSATION TABLE
| | | | | | | | Change in Pension | | |
| | | | | | | | Value & | | |
| | | | | | | Non-Equity | Non-qualified | | |
| | | | | | | Incentive | Deferred | All | |
| | | | | Stock | Option | Plan | Compensation | Other | |
| Name and Principal | | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Totals |
| Position | Period | ($) | ($) | ($) | ($) | (S) | ($) | ($) | ($) |
| Jay Christopher Bautista, CEO | Year ended December 31, 2014 | 111,971 | - | 34,000(1) | 533,717(2) | - | - | - | 679,688 |
| | | | | | | | | | |
Owen Dukes, Former CEO(3) | Year ended December 31, 2014 | - | - | - | - | - | - | - | - |
| | Eleven months ended December 31, 2013(5) | - | - | - | - | - | - | - | - |
| | | | | | | | | | |
| Robert Zysblat, Former President(4) | Year ended December 31, 2014 | - | - | - | - | - | - | - | - |
| | Eleven Months ended December 31, 2013(5) | - | - | - | - | - | - | - | - |
| (1) | On May 29, 2014 Mr. Bautista was granted 200,000 shares of common stock with a substantial right of forfeiture as follows: The Employee cannot transfer the shares and must return all shares to the Employer if he terminates employment within two years from date of issuance. |
| (2) | On May 29, 2014 Mr. Bautista was awarded an Option to purchase 5,000,000 shares of common stock vesting over a three year period. |
| (3) | Mr. Dukes was appointed CEO of the Company on December 31, 2013 and resigned on May 29, 2014. |
| (4) | Mr. Zysblat was appointed President and Chairman of the Company on December 31, 2013 and resigned on May 29, 2014. |
| (5) | An entity owned by Mr. Dukes and Zysblat provided management services to the Company. Fees incurred for the eleven months ended December 31, 2013 was $277,940. |
The following summary compensation table sets forth information concerning compensation for services rendered in all capacities during 2013 awarded to, earned by or paid to Vanity’s executive officers.
| | | | | | | | Change in Pension | | |
| | | | | | | | Value & | | |
| | | | | | | Non-Equity | Non-qualified | | |
| | | | | | | Incentive | Deferred | All | |
| | | | | Stock | Option | Plan | Compensation | Other | |
| Name and Principal | | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Totals |
| Position | Year | ($) | ($) | ($) | ($) | (S) | ($) | ($) | ($) |
| Philip Ellett, Former CEO | 2013 | 28,000 | | | | | | - | 28,000 |
| (1) Mr. Ellett was appointed CEO, CFO and Chairman of the Company on October 9, 2012 and resigned on December 31, 2013. |
Employment Agreements
On May 29, 2014 the Company entered into an employment agreement (the “Bautista Employment Agreement”) with Jay Christopher Bautista to serve as Chief Executive Officer (CEO). The Agreement has an initial term of three years. Pursuant to the Bautista Employment Agreement, the Company agreed to pay Mr. Bautista an annual salary of $185,000, and issued to Mr. Bautista (i) 200,000 shares of common stock, which must be returned to the Company if Mr. Bautista terminates employment with the Company within two years from the date of issuance; and (ii) an option to purchase 5,000,000 shares of common stock with an exercise price at the closing trading price as of the date employment begins, which will vest as follows: 1,000,000 shares after 12 months of employment, 2,000,000 shares after 24 months of employment and 2,000,000 shares after 36 months of employment. Upon a change of control, merger or acquisition involving the Company, 50% of the unvested stock options will accelerate their vesting schedule and become exercisable.
On December 31, 2013 the Company entered into an employment agreement (the “Dukes Agreement”) with Owen Dukes to serve as Chief Executive Officer (CEO) The Agreement had an initial term of five years. The base salary under the Dukes Agreement was an annual gross salary of $180,000. Mr. Dukes resigned as Chief Executive Officer on May 29, 2014.
On December 31, 2013 the Company entered into an employment agreement (the “Zysblat Agreement”) with Robert Zysblat to serve as President and Chairman of the Board. The Zysblat Agreement had an initial term of five years. The base salary under the Zysblat Agreement was an annual gross salary of $180,000. Mr. Zysblat resigned as President on May 29, 2014.
Outstanding Equity Awards at Fiscal Year-End
None.
Director Compensation
The following table sets forth compensation paid to our directors in 2014, excluding compensation included in the summary compensation table above;
Name (a) | | Fees Earned or Paid in Cash ($) (b) | | | Stock Awards ($) (c) | | | Option Awards ($) (d) | | | Non-Equity Incentive Plan Compensation ($) (e) | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (f) | | | All Other Compensation ($) (g) | | | Total ($) (h) |
| Jay Christopher Bautista | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 |
| Scott Weiselberg | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Michael Brodsky | | $ | 0 | | | $ | 19,000(1) | | | $ | | | | | 0 | | | | 0 | | | | 0 | | | $ | 19,000 |
| Owen Dukes | | $ | 0 | | | $ | 0 | | | $ | 0 | | | | 0 | | | | 0 | | | | 0 | | | $ | 0 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Robert Zysblat | | $ | 0 | | | $ | 0 | | | $ | 0 | | | | 0 | | | | 0 | | | | 0 | | | $ | 0 |
(1) Represents grant of 100,000 shares of common stock.
Risk Management
The Company does not believe risks arising from its compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, as of March 23, 2015 with respect to the beneficial ownership of the Company’s outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
Beneficial ownership is determined in accordance with the rules of the SEC. Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the shareholder’s name.
Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | | Percentage of Class (1) | |
| Jay Christopher Bautista | | | 200,000 | | | | | * |
| Scott Weiselberg | | | 100,000 | | | | | * |
| Michael Brodsky(2) | | | 65,377,354 | | | | 66.5 | % |
| CP US Income Group, LLC | | | 7,000,000 | | | | 7.1 | % |
| IBC Equity Holdings, Inc. | | | 5,000,000 | | | | 5.1 | |
| Thalia Woods Management, Inc. (3) | | | 65,277,354 | | | | 66.4 | |
| All officers and directors as a group (3 persons) | | | 65,577,354 | | | | 66.8 | % |
* Less than 1%.
(1) Percentage of ownership is based on 98,381,445 shares of common stock issued and outstanding as of March 23, 2015.
(2) Includes 65,277,354 shares held by Thalia Woods Management, Inc. Mr. Brodsky has sole voting and dispositive power over the shares held by Thalia Woods Management, Inc.
(3) Michael Brodsky has sole voting and dispositive power over the shares held by Thalia Woods Management, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
None.
Director Independence
Scott Weiselberg is independent as term is defined under the Nasdaq Marketplace Rules.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On October 28, 2013, the Company dismissed Kabani & Company, Inc. (“Kabani”), as its independent registered public accounting firm. The Company’s Board of Directors appointed Bedinger & Company (“Bedinger”) as its independent registered public accounting firm, effective as of October 28, 2013.
The aggregate fees billed to us by Kabani for professional services rendered during the years ended December 31, 2013 and 2012, respectively, in connection with their audits of our December 31, 2012 consolidated financial statements and reviews of our interim consolidated financial statements included in our quarterly reports on Form 10-Q and other professional services as audit fees, audit-related fees, tax fees and all other fees are set forth in the table below:
Fee Category | | Year ended December 31, 2013 | | | Year ended December 31, 2012 | |
| | | | | | | |
| Audit fees (1) | | $ | 45,000 | | | $ | 57,000 | |
| Audit-related fees (2) | | $ | - | | | $ | - | |
| Tax fees (3) | | $ | - | | | $ | - | |
| All other fees (4) | | $ | - | | | $ | - | |
| Total fees | | $ | 45,000 | | | $ | 57,000 | |
(1) Audit fees consist of fees incurred for professional services rendered for the audits of financial statements, for reviews of our interim consolidated financial statements included in our quarterly reports on Form 10-Q and for services that are normally provided in connection with statutory or regulatory filings or engagements.
(2) Audit-related fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review of our consolidated financial statements, but are not reported under “Audit fees.”
(3) Tax fees consist of fees billed for professional services relating to tax compliance, tax planning, and tax advice.
(4) All other fees consist of fees billed for all other services.
The aggregate fees billed to us by Bedinger for professional services rendered during the years ended December 31, 2014 and 2013 respectively in connection with their audits of our December 31, 2014 and 2013 consolidated financial statements and reviews of our interim consolidated financial statements included in our quarterly reports on Form 10-Q and other professional services as audit fees, audit-related fees, tax fees and all other fees are set forth in the table below:
Fee Category | | Year ended December 31, 2013 | | | Year ended December 31, 2014 |
| | | | | | |
| Audit fees (1) | | $ | 20,000 | | $ | 42,982 |
| Audit-related fees (2) | | $ | - | | $ | |
| Tax fees (3) | | $ | - | | $ | |
| All other fees (4) | | $ | - | | $ | |
| Total fees | | $ | 20,000 | | $ | 42,982 |
The Board of Directors selects our independent public accountant, establishes procedures for monitoring and submitting information or complaints related to accounting, internal controls or auditing matters, engages outside advisors, and makes decisions related to funding the outside auditory and non-auditory advisors.
ITEM 15. EXHIBITS
| Exhibit Number | | Description |
| 2.1 | | Agreement and Plan of Merger and Reorganization (filed as exhibit to 8-K filed with the SEC on January 7, 2014 and incorporated herein by reference). |
| 3.1 | | Certificate of Incorporation (filed as exhibit to Form 10-SB filed with the SEC on March 26, 2007 and incorporated herein by reference). |
| 3.2 | | Certificate of Designation of Series A Convertible Preferred Stock (filed as exhibit to 8-K filed with the SEC on January 6, 2011 and incorporated herein by reference). |
| 3.3 | | Certificate of Designation of Series B Convertible Preferred Stock (filed as exhibit to 8-K filed with the SEC on July 19, 2011 and incorporated herein by reference). |
| 3.4 | | Certificate of Designation of Series C Convertible Preferred Stock (filed as exhibit 8-K filed with the SEC on January 7, 2014. |
| 3.5 | | Certificate of Amendment to Certificate of Incorporation (filed as exhibit to 8-K filed with the SEC on July 19, 2011 and incorporated herein by reference). |
| 3.6 | | By-laws (filed as exhibit to 10-SB filed with the SEC on March 26, 2007 and incorporated herein by reference). |
| 10.1 | | Employment Agreement, dated December 31, 2013 between the Company and Owen Dukes |
| 10.2 | | Employment Agreement, dated December 31, 2013 between the Company and Robert Zysblat |
| 10.3 | | Securities Purchase Agreement, dated December 31, 2013, between the Company and the Investor named therein (incorporated by reference to 8-K filed on January 7, 2014). |
| 10.4 | | 8% Convertible Debenture, dated December 31, 2013 (incorporated by reference to 8-K filed on January 7, 2014). |
| 10.5 | | 10% Convertible Debenture, dated July 29, 2010 (incorporated by reference to 8-K filed on August 3, 2010). |
| 10.6 | | 8% Convertible Debenture, dated May 30, 2012 (incorporated by reference to 8-K filed on June 6, 2012). |
| 10.7 | | 10% Convertible Debenture, dated October 26, 2012 (incorporated by reference to 8-K filed on November 13, 2012). |
| 10.8 | | 8% Convertible Debenture, dated February 21, 2014 (incorporated by reference to 10-K filed on March 31, 2014). |
| 10.9 | | 8% Convertible Debenture, dated March 21, 2014 (incorporated by reference to 10-K filed on March 31, 2014). |
| 10.10 | | 8% Convertible Debenture, dated March 21, 2014 (incorporated by reference to 10-K filed on March 31, 2014). |
| 10.11 | | 8% Convertible Debenture, dated March 26, 2014 (incorporated by reference to 10-K filed on March 31, 2014). |
| 10.12 | | Form of Securities Purchase Agreement, dated February 21, 2014, March 21, 2014 and March 26, 2014 (incorporated by reference to 10-K filed on March 31, 2014) |
| 10.13 | | Facility Letter (incorporated by reference to 8-K filed on April 11, 2014). |
| 10.14 | | Stock Purchase Agreement (incorporated by reference to 8-K filed on April 11, 2014). |
| 10.15 | | Debenture (incorporated by reference to 8-K filed on April 11, 2014). |
| 10.16 | | Guaranty and Indemnity (incorporated by reference to 8-K filed on April 11, 2014). |
| 10.17 | | Securities Purchase Agreement by and between Thinspace Technology, Inc. and CP US Income Group, LLC, dated May 29, 2014 (incorporated by reference to 8-K filed on June 4, 2014). |
| 10.18 | | Debenture, dated May 29, 2014, issued to CP US Income Group, LLC (incorporated by reference to 8-K filed on June 4, 2014). |
| 10.19 | | Securities Purchase Agreement by and between Thinspace Technology, Inc. and Greystone Capital Partners, Inc., dated May 29, 2014 (incorporated by reference to 8-K filed on June 4, 2014). |
| 10.20 | | Debenture, dated May 29, 2014, issued to Greystone Capital Partners, Inc. (incorporated by reference to 8-K filed on June 4, 2014). |
| 10.21 | | Securities Purchase Agreement by and between Thinspace Technology, Inc. and IBC Funds LLC, dated May 29, 2014 (incorporated by reference to 8-K filed on June 4, 2014). |
| 10.22 | | Debenture, dated May 29, 2014, issued to IBC Funds LLC (incorporated by reference to 8-K filed on June 4, 2014). |
| 10.23 | | Termination Agreement by and between Thinspace Technology, Inc. and Robert Zysblat, dated May 29, 2014 (incorporated by reference to 8-K filed on June 4, 2014). |
| 10.24 | | Termination Agreement by and between Thinspace Technology, Inc. and Owen Dukes, dated May 29, 2014 (incorporated by reference to 8-K filed on June 4, 2014). |
| 10.25 | | Employment Agreement by and between Thinspace Technology, Inc. and Jay Christopher Bautista, dated May 29, 2014 (incorporated by reference to 8-K filed on June 4, 2014). |
| 10.26 | | Firmware NPA (incorporated by reference to 8-K filed on October 15, 2014). |
| 10.27 | | Firmware Note (incorporated by reference to 8-K filed on October 15, 2014). |
| 10.28 | | VAR NPA (incorporated by reference to 8-K filed on October 15, 2014). |
| 10.29 | | VAR Note (incorporated by reference to 8-K filed on October 15, 2014). |
| 10.30 | | VAR Security Agreement (incorporated by reference to 8-K filed on October 15, 2014). |
| 10.31 | | Security Agreement Rider (incorporated by reference to 8-K filed on October 15, 2014). |
| 10.32 | | Firmware Security Agreement (incorporated by reference to 8-K filed on October 15, 2014). |
| 10.33 | | LG SPA (incorporated by reference to 8-K filed on March 26, 2015). |
| 10.34 | | LG Note (incorporated by reference to 8-K filed on March 26, 2015). |
| 10.35 | | Iconic SPA (incorporated by reference to 8-K filed on March 26, 2015). |
| 10.36 | | Iconic Debenture (incorporated by reference to 8-K filed on March 26, 2015). |
| 10.37 | | Black Mountain SPA (incorporated by reference to 8-K filed on March 26, 2015). |
| 10.38 | | Black Mountain Note (incorporated by reference to 8-K filed on March 26, 2015). |
| 16 | | Letter from Kabrani & Company, Inc. (filed as exhibit to 8-K filed with the SEC on November 4, 2013 and incorporated herein by reference). |
| 21 | | Subsidiaries: Thinspace Technology Ltd. (United Kingdom corporation) Thinspace Technology, Ltd (Nevada corporation) |
| 31.1 | | Certification of principal executive and financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Certification of principal executive and financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| EX-101.INS | | XBRL INSTANCE DOCUMENT |
| EX-101.SCH | | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT |
| EX-101.CAL | | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
| EX-101.DEF | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
| EX-101.LAB | | XBRL TAXONOMY EXTENSION LABELS LINKBASE |
| EX-101.PRE | | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| | THINSPACE TECHNOLOGY, INC. | |
| | | | |
| Dated: March 31, 2015 | By: | /s/ Jay Christopher Bautista | |
| | | Name:Jay Christopher Bautista | |
| | | Title: Chief Executive Officer (principal executive, financial and accounting officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | | TITLE | | DATE |
| | | | | |
| /s/ Jay Christopher Bautista | | Chief Executive Officer, Director | | March 31 , 2015 |
| Jay Christopher Bautista | | (principal executive, financial and accounting officer) | | |
| | | | | |
| /s/ Scott Weiselberg | | Director | | March 31, 2015 |
| Scott Weiselberg | | | | |
| | | | | |
| /s/ Michael Brodsky | | Director | | March 31, 2015 |
| Michael Brodsky | | | | |
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