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PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three an six month periods ended June 30, 2014, are not necessarily indicative of the results that can be expected for the year ending December 31, 2014.

As used in this Quarterly Report, the terms "we,” "us,” "our,” and “Poly Shield” mean Poly Shield Technologies Inc. and our subsidiaries Ecolutions, Inc., Poly Shield Technologies (BVI) Ltd. and Poly Shield Technologies (UK) Limited, unless otherwise indicated. All dollar amounts in this Quarterly Report are in U.S. dollars unless otherwise stated.

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POLY SHIELD TECHNOLOGIES INC.

CONSOLIDATED BALANCE SHEETS

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

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POLY SHIELD TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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

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POLY SHIELD TECHNOLOGIES INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

(unaudited)

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

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POLY SHIELD TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

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

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POLY SHIELD TECHNOLOGIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

Poly Shield Technologies Inc. (the “Company”) was incorporated in the state of Delaware on March 2, 2000 and is listed on the OTCQB under the symbol “SHPR”. The Company is in the business of developing and marketing environmental and pollution emission control solutions to a worldwide maritime market.

Poly Shield Technologies Inc.’s main focus is on the development and marketing of its proprietary DSOX-15 and DSOX-20 Fuel Purification Systems, designed to remove sulfur from marine fuel. These technologies are currently aimed at the maritime industry which includes vessels for cruise-line, freight shipping and tanker companies and can be installed during normal vessel operation.

Basis of presentation

The unaudited interim consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  They do not include all information and notes required by generally accepted accounting principles for complete financial statements.  However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2013. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and six months ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  For further information, these unaudited financial statements and the related notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2013, included in the Company’s report on Form 10-K.

Reclassifications

Certain prior period amounts in the accompanying consolidated interim financial statements have been reclassified to conform to the current period’s presentation.  These reclassifications had no effect on the consolidated results of operations or financial position for any period presented.

Going Concern

The accompanying unaudited consolidated interim financial statements have been prepared assuming the Company will continue as a going concern. Continuation as a going concern is dependent upon the ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due and ultimately upon its ability to achieve profitable operations.  The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that the Company will be able to continue as a going concern.  These unaudited interim consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.  Management intends to obtain additional funding by borrowing funds from its directors and officers, issuing promissory notes and/or a private placement of common stock.

NOTE 2 - RELATED PARTY TRANSACTIONS

Amounts due to related parties at June 30, 2014 and December 31, 2013:

Amounts are unsecured, due on demand and bear no interest.  

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During the six months ended June 30, 2014 and 2013, the Company incurred the following expenses with related parties:  

NOTE 3 - EMPLOYMENT AND MANAGEMENT CONSULTING AGREEMENTS

Employment and Management Consulting Agreement with President, CEO and CTO

On December 1, 2012 (and as amended on December 30, 2013 and February 28, 2014), the Company entered into an Employment Agreement with its President, CEO and CTO (the “Vendor”). This agreement became effective on February 5, 2013 (“Effective Date”). Under the terms of the Employment Agreement, the Vendor was appointed the Company’s Chief Executive Officer and received a signing bonus of $180,000. Beginning on the first anniversary of the Effective Date, the Vendor was to be paid an annual base salary of $180,000 per year. In addition, on the Effective Date, the Company issued 154,000,000 shares of its common stock with a fair value of $81,620,000, which were placed in escrow and were to be released to the Vendor upon delivery of bona fide contracts for the sale or lease of products or services at a rate of one share for each $0.25 in revenue. Escrowed stock was to be released in increments of 1,250,000 shares of common stock.

On March 10, 2014, the Company and the Vendor terminated the Employment Agreement and entered into a Technology Transfer Agreement whereby the Vendor transferred the title of certain patent applications to the Company in return for the release of 54,000,000 of the aforementioned 154,000,000 shares. The remaining 100,000,000 shares were cancelled (Notes 6 and 9).

On March 10, 2014, the Company entered into a management consulting agreement (the “Management Consulting Agreement”) with the Vendor whereby the Vendor agreed to provide consulting services to the Company in return for a monthly fee of $22,500 and the issuance of 10,000,000 warrants with an exercise price of $1.00, which expire on March 10, 2017 (Note 9). The Vendor may choose to exercise the warrants for up to 5,000,000 shares of common stock by way of a cashless exercise. Either party may terminate the agreement at any time with sixty days written notice.

The fair value of the warrants issued for the Management Consulting Agreement was calculated to be $9,677,730 and was expensed at the time of issuance. The fair value was determined using the Black-Scholes option pricing model at the grant date using the following assumptions: expected life of 3 years, risk-free interest rate of 0.79%, expected dividend yield of 0% and expected stock price volatility of 352%.

Management Consulting Agreements with CFO and Senior VP of Business Development

On June 25, 2014, the Company entered into two separate Management Consulting Agreements (the “Management Agreements”) with its Chief Financial Officer and its Senior Vice President of Business Development. Under the terms of the Management Agreements, the Company agreed to management fees of $7,500 per month payable to its CFO and $22,500 per month payable to its Senior Vice President of Business Development. Both Management Agreements are payable retroactively beginning as of April 1, 2014 and expire on June 25, 2017.

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NOTE 4 - LICENSE AGREEMENT

On March 12, 2012, the Company entered into a license agreement with Teak Shield (the “Teak Shield License”) and its owners Robert and Marion Diefendorf (the “Licensors”) whereby the Company acquired a license to market and sell Teak Shield’s licensed products. In exchange, the Company agreed to pay a 5% royalty to the Licensors with a minimum $100,000 annual royalty payment, and agreed to issue to the Licensors 1,666,667 shares of the Company’s common stock.  

At December 31, 2013, management determined that the Teak Shield License was fully impaired.

On June 24, 2014, the Company and Licensors reached an agreement to amend the Teak Shield License (the “Amended Teak Shield License”).  Both parties agreed to release each other from any and all obligations pursuant to the original Teak Shield License, which resulted in reversal of the royalty fees accrued of $170,833.

The Amended Teak Shield License has an initial term of six years and may be automatically renewed for successive two-year terms. The Company is not required to pay any royalty, and no additional consideration is required in order to maintain the licensing rights.

NOTE 5 - DISTRIBUTION AND LICENSE RIGHTS

On January 31, 2013, the Company issued 100,000 shares of its common stock with a fair value of $53,000 as a purchase price for all of the issued and outstanding shares in the capital of Ecolutions which held the rights to the intellectual property of Green Tech Marine AS (“GTM”). As a result of acquiring Ecolutions, the Company acquired distribution and license rights to the Exhaust Scrubber, a proprietary exhaust gas scrubber technology developed by GTM (“GTM Contracts”).

The GTM Contracts are in effect until November 15, 2022, and may be automatically renewed for a further ten year period unless either party gives written notice of termination at least 90 days prior to the then current term.  

The GTM Contracts are amortized over 10 years on a straight line basis. During the six months ended June 30, 2014, amortization expense of $2,650 (June 30, 2013 - $2,208) was recorded.

NOTE 6 - TECHNOLOGY TRANSFER AGREEMENT

On March 10, 2014, the Company entered into a Technology Transfer Agreement with the Vendor.  Under the terms of the Technology Transfer Agreement, the Vendor agreed to sell to the Company all of his right, title and interest in and to all technologies owned by him that relate to the abatement and reduction of emissions and exhausts from internal combustion engines through the pre-treatment of input fuels, the treatment of exhaust gases produced by such engines, or any combination thereof (collectively, the “Technology”), including all of the Vendor’s right, title and interest in and to certain patent applications to the Technology.

In consideration for the Technology, the Company agreed to release 54,000,000 of the total 154,000,000 shares of common stock that were previously issued to the Vendor and held in escrow, subject to forfeiture or release upon the fulfillment of certain performance conditions as set in the Employment Agreement.  The remaining 100,000,000 shares have been cancelled (Notes 3 and 9).  

The fair value of the 54,000,000 shares which were released for the Technology was $52,380,000. The Technology is amortized over 10 years on a straight line basis. During the six months ended June 30, 2014, amortization expense of $1,527,750 (June 30, 2013 - $Nil) was recorded.

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NOTE 7 - EQUIPMENT

Amortization schedule for the equipment at June 30, 2014 and December 31, 2013:

The equipment consists of testing and laboratory tools and machinery, and is amortized on a straight-line basis over its useful life of five years.   

NOTE 8 - UNEARNED REVENUE AND WORK IN PROGRESS

During the six months ended June 30, 2014, the Company received $975,000, as a deposit for future installation of its DSOX Fuel Purification System (the “DSOX System”) pursuant to its April 15, 2014 purchase and services agreement. The agreement provides for the purchase of up to ten additional DSOX Systems.

During the six months ended June 30, 2014, the Company started a manufacturing process of its first land-based DSOX System, representing a combination of two DSOX-15 Systems originally designed to be used on board of a ship. As of June 30, 2014, the Company recorded $741,511 as work in progress, of which $109,820 was represented by the cost of parts and equipment required to build DSOX System and $631,691 consisted of fees charged by the external contractors for building the DSOX System.

NOTE 9 - SHARE CAPITAL

On March 10, 2014, in consideration for the Technology transferred by the Vendor to the Company (Notes 3 and 6), the Company agreed to release, from escrow, 54,000,000 shares of the total 154,000,000 shares of common stock that were previously issued to the Vendor and held in escrow.  The fair value of the 54,000,000 shares was $52,380,000. The remaining 100,000,000 shares were cancelled.  

On April 1, 2014, the Company recorded an obligation to issue 51,000 shares of its common stock with a fair value of $46,410 for the consulting and website design services. As of June 30, 2014, these shares remained unissued.

Warrants

On January 15, 2014, the Company entered into a binding letter agreement (the “Letter Agreement”) with KF Business Ventures LP (the “Lender”), which was superseded by the formal definitive loan agreement signed on February 11, 2014 and further amended on March 10, 2014 (the “KF Loan Agreement”). In consideration for the KF Loan Agreement, the Company issued to the Lender non-transferrable share purchase warrants to purchase a total of 6,200,000 shares of the Company’s common stock, exercisable at a price of $1 per share.  Warrants for 2,200,000 shares of the Company’s common stock expire on January 15, 2015, and warrants for 4,000,000 shares of the Company’s common stock expire on January 15, 2018.  The Lender may choose to exercise the warrants for up to 3,100,000 shares of common stock by way of a cashless exercise (Notes 10 and 12).

On March 10, 2014, the Company signed an amendment to the KF Loan Agreement (Note 10). Under the terms of the amended agreement, the Company issued to the Lender non-transferrable share purchase warrants for a total of 704,546 shares of the Company’s common stock with an initial exercise price of $1 per share (collectively, the “Additional Warrants”).  The Additional Warrants to purchase a total of 250,000 shares of the Company’s common stock expire on January 15, 2015, with the remaining 454,546 Additional Warrants expiring on January 15, 2018.  The Additional Warrants may be exercised by way of a cashless exercise for a total of up to 352,273 shares.

On March 10, 2014, in consideration for the Management Consulting Agreement, the Company issued non-transferrable share purchase warrants to purchase a total of 10,000,000 shares of the Company’s common stock with an initial exercise price of $1 per share (Note 3). The warrants expire on March 10, 2017. The Vendor may choose to exercise the warrants for up to 5,000,000 shares of common stock by way of a cashless exercise.

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Details of warrants outstanding as at June 30, 2014 are as follows:

At June 30, 2014, the weighted-average remaining contractual life of the outstanding share purchase warrants was 2.61 years.

NOTE 10 - NOTES AND LOANS PAYABLE

Acamar Loan

On April 19, 2012, the Company signed a loan agreement for $260,000, repayable on October 31, 2013 (the “Acamar Loan”). The Acamar Loan bears interest at 3.5% per month for an effective rate of 51% per annum and is secured by the Teak Shield License (Note 4). The repayment of Acamar Loan was extended to June 30, 2014.

During the six months ended June 30, 2014, the Company paid $104,000 in interest (June 30, 2013 - Nil). As of June 30, 2014, the total principle payable under the Acamar Loan was $380,688 (December 31, 2013 - $377,500) and accrued interest totaled $101,450 (December 31, 2013 - $108,059).

KF Business Ventures Loan Agreement

Under the KF Loan Agreement (Notes 9 and 12), the Lender agreed to lend to the Company up to $2,000,000 (the “KF Loan”) in four equal installments of $500,000 each. As of June 30, 2014 the full amount of the loan was advanced to the Company.

The KF Loan accumulates interest at a rate of 10% per annum, compounded monthly. Principal and interest will become payable in 18 equal monthly installments commencing on January 1, 2015.  The Company has the right to prepay the amounts outstanding under the KF Loan at any time in increments of not less than $250,000.  

As additional consideration for the Lender agreeing to loan the funds to the Company, the Company has agreed to issue to the Lender non-transferrable share purchase warrants to purchase a total of 6,904,546 shares of the Company’s common stock, exercisable at a price of $1 per share (Notes 9 and 12).  Warrants for 2,450,000 shares of the Company’s common stock expire on January 15, 2015, and warrants for 4,454,546 shares of the Company’s common stock expire on January 15, 2018.  The Lender may choose to exercise the warrants for up to 3,452,273 shares of common stock by way of a cashless exercise.

The fair value of the warrants was calculated to be $5,821,189 using the Black-Scholes option pricing model at the grant date using the following assumptions:

Under the guidance provided by ASC 470-20-25-2, proceeds from the sale of debt instrument with stock purchase warrants shall be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants shall be accounted for as paid-in capital. The remainder of the proceeds shall be allocated to the debt instrument portion of the transaction.

Management has determined that the warrants in this case are detachable from the debt instrument, as the debt instrument does not have to be surrendered to exercise the warrant.

The relative fair value of the warrants was determined to be $1,536,353 and the value allocated to the debt portion of the instrument was determined to be $463,647 at the time of issuance using an effective interest rate of 15%. During the six months ended June 30, 2014, the Company recognized accretion expense of $136,313. At June 30, 2014, the Company accrued $48,526 in interest payable under the KF Loan (December 31, 2013 - $Nil). $470,383 of the loan is due in the next 12 months.

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Other Loans

During the six months ended June 30, 2014, the Company received an advance of CAD$50,000 ($48,286).

The tables below summarize the other loans outstanding as at June 30, 2014 and December 31, 2013:

NOTE 11 - NOTES AND LOANS RECEIVABLE

During the six months ended June 30, 2014, the Company advanced a total of $150,000 to its former subsidiary, New World Technologies Group Inc. The loans bare interest at 6% per year compounded monthly and are due on demand. As at June 30, 2014, the amount receivable was impaired due to uncertainty of collectability.

NOTE 12 - SUBSEQUENT EVENTS

UK Subsidiary

On July 9, 2014, the Company formed a subsidiary, Poly Shield Technologies (UK) Limited, under the Companies Act 2006 of the United Kingdom.

Second KF Business Ventures Loan Agreement

On July 28, 2014, the Company entered into a loan agreement (the “Second KF Loan”) with KF Business Ventures LP for an additional $2,400,000, to be advanced in eight equal instalments of $300,000 each, commencing on September 1, 2014, and on the first day of each consecutive calendar month thereafter until fully advanced.   The Second KF Loan is conditional upon the Company agreeing to amend the First KF Loan Agreement (Note 10) and issuing to the Lender non-transferrable share purchase warrants for a total of 9,600,000 shares of the Company’s common stock, exercisable at a price of $0.50 per share for a period expiring September 1, 2019, with cashless exercise rights for up to 4,800,000 shares.

The Second KF Loan accumulates interest at a rate of 10% per annum, compounded monthly and is repayable in full on January 15, 2016. The maturity date may be extended by the Company to January 15, 2017 by the issuance of additional share purchase warrants equal to one-half of the outstanding principal and unpaid interest at January 15, 2016, with an initial exercise price of $0.50 per share and expiring on September 1, 2021.  

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report constitute "forward-looking statements". These statements, identified by words such as “plan,” "anticipate," "believe," "estimate," "should," "expect" and similar expressions, include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties include those set forth under this caption "Management's Discussion and Analysis" and elsewhere in this Quarterly Report. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. We advise you to carefully review the reports and documents we file from time to time with the United States Securities and Exchange Commission (the “SEC”).

OVERVIEW

We were incorporated under the laws of the State of Delaware on March 2, 2000, under the original name 411 Place.com Inc.  On February 28, 2001, we changed our name to Artescope, Inc., on July 29, 2002, we changed our name to GlobeTrac Inc. and on July 11, 2012, we changed our name to Poly Shield Technologies Inc.

Recent Corporate Developments

The following corporate developments have occurred during the quarter ended June 30, 2014, and up to the date of the filing of this report:

Purchase and Services Agreement with Magical Cruise Company, Limited

On April 15, 2014, we entered into a purchase and services agreement (the “Purchase and Services Agreement”) with Magical Cruise Company, Limited (“DCL”) regarding the procurement and installation of our DSOX-15 Pre-Combustion Fuel Purification System including an in-line sulfur monitor (our DSOX fuel purification systems being collectively referred to as the “DSOX Systems”), for reducing the sulfur oxide content of marine fuel oil.  

Under the terms of the Purchase and Services Agreement, DCL agreed to purchase from us one DSOX System, with a possibility for the purchase of up to ten additional DSOX Systems at the same price. Additional details of our agreement with DCL are provided in our Current Report on Form 8-K, filed on April 17, 2014.  As of the date of this report, we have completed the manufacturing of required components for the first DSOX System to be installed on DCL's vessel. 

Change in Executive Officers and Directors

On April 16, 2014, James Pakulis resigned as our President and as a member of our Board of Directors. Mr. Pakulis’s resignation was not due to, and was not caused by, in whole or in part, any disagreement with the Company, whether related to our operations, policies, and practices or otherwise. On April 16, 2014, we appointed Rasmus Norling as our President in place of Mr. Pakulis.

On May 16, 2014, Brad Eckenweiler resigned as our Chief Executive Officer and as a member of our Board of Directors. Mr. Eckenweiler’s resignation was not due to, and was not caused by, in whole or in part, any disagreement with the Company, whether related to our operations, policies, practices or otherwise. Upon his resignation, we made a severance payment of $252,000 to Mr. Eckenweiler. On May 16, 2014, we appointed Mr. Norling as our Chief Executive Officer in place of Mr. Eckenweiler. In addition to replacing Mr. Pakulis and Mr. Eckenweiler as our President and Chief Executive Officer, respectively, Mr. Norling continues to act as our Chief Technical Officer and as a member of our Board of Directors.

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On June 25, 2014, we entered into a Management Consulting Agreement with our Chief Financial Officer, Joao (John) da Costa. Under the terms of his Management Consulting Agreement, Mr. da Costa will continue to act as our Chief Financial Officer and Treasurer for a term of three years, expiring on June 25, 2017, and will be entitled to a monthly remuneration of $7,500, payable retroactively beginning as of April 1, 2014.

Also on June 25, 2014, we entered into a Management Consulting Agreement with Mitchell Reed Miller, a member of our Board of Directors. Under the terms of his Management Consulting Agreement, Mr. Miller will act as our Senior Vice President of Business Development for a term of three years, expiring on June 25, 2017, and will be entitled to a monthly remuneration of $22,500, payable retroactively beginning as of April 1, 2014.

Developments to the DSOX Systems and new Patent Application

On May 20, 2014, we announced the launch of the DSOX-20 Pre-Combustion Desulfurization Fuel Purification System (the “DSOX-20”), a patent pending technology that enhances our DSOX-15 System by including several new innovations. This DSOX-20 system will be used for all future installations.

On July 21, 2014, we announced the filing of a new patent application. The new application covers the process of using our DSOX-20 System in combination with an exhaust gas scrubber.

Amendment and Restatement of Teak Shield License Agreement

On or about June 24, 2014, we completely amended and restated our license agreement for the Teak Shield fluoropolymer coatings sold by Teak Shield Corp. (the “Amended Teak Shield License”).  Under the terms of the Amended Teak Shield License, we have a non-exclusive right to sell the fluoropolymer coating products sold by Teak Shield. The fluoropolymer coatings will be sold to us by Teak Shield at the lowest price charged by Teak Shield to third party purchasers.  Under the terms of the Amended Teak Shield License, Teak Shield will no longer be entitled to any royalties from the sale by us of any of their products.  In addition, our option to purchase all of Teak Shield’s rights to its fluoropolymer products was terminated.  The Amended Teak Shield License will extend for an initial period of six years.

Installation of First DSOX System in Mobile Alabama

On or about June 19, 2014, we began the installation of our first DSOX System in Mobile, Alabama for LMS Ship Management Inc. (“LMS”). The DSOX System being installed is a combination of two DSOX-15 Systems. Initially it was contemplated that these two DSOX-15 Systems would be installed on cargo ships operated and managed by LMS.  However, in discussions with LMS, it was agreed that we would combine two DSOX-15 systems into one and install the combined unit as a stand-alone on-shore system at LMS’ facilities in Mobile, Alabama. Installation of the DSOX System is currently ongoing.  Once installation is complete, we will work with LMS on obtaining certification that the installed system meets current MEPC standards.  

Approval of Name Change

On June 26, 2014, our Board of Directors approved an amendment to our Certificate of Incorporation to change the name of the Company to “Triton Emission Solutions Inc.” (the “Name Change”). On July 1, 2014, we received a written consent of Mr. Norling, our President, Chief Executive and Chief Technology Officer as well as majority shareholder approving the Name Change. As of the date of this Quarterly Report the name change has not yet been effected.

Poly Shield Technologies (UK) Limited

On July 9, 2014, we formed a subsidiary, Poly Shield Technologies (UK) Limited under the Companies Act 2006 of the United Kingdom. This subsidiary will concentrate its efforts on marketing and distribution of our DSOX Systems to a European market.

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Second KF Business Ventures Loan Agreement

On July 28, 2014, we entered into a loan agreement (the “Second KF Loan Agreement”) with KF Business Ventures LP (“KFBV”) for an additional $2,400,000, to be advanced in eight equal installments of $300,000 each. The first installment is expected to be advanced on September 1, 2014, with the remaining installments advanced on the first day of each consecutive calendar month thereafter. Advance of the loan is conditional upon (1) our agreeing to amend the First KF Loan Agreement (see “Second Amendment to First KF Loan Agreement”); (2) our issuing to the Lender non-transferrable share purchase warrants for a total of 9,600,000 shares of our common stock, exercisable at a price of $0.50 per share for a period expiring September 1, 2019, with cashless exercise rights for up to 4,800,000 shares; and (3) our agreeing with KFBV on a monthly budget for our Company.

Amounts payable under the Second KF Loan Agreement will accumulate interest at a rate of 10% per annum, compounded monthly and will be repayable in full on January 15, 2016. We may extend the maturity date of the loan to January 15, 2017 by issuing KFBV additional share purchase warrants equal to one-half of the outstanding principal and unpaid interest at January 15, 2016, with an initial exercise price of $0.50 per share and expiring on September 1, 2021.  

In addition, as part of the Second KF Loan Agreement, we have agreed to appoint Robert C. Kopple, the principal of KFBV, as Chairman of our Board of Directors on or before September 1, 2014.  In connection with his appointment we will be required to issue to Mr. Kopple options to purchase up to 2,500,000 shares of common stock, vesting at a rate of 500,000 shares per year, exercisable at a price of $0.50 per share, and expiring 5 years after vesting.  

Second Amendment to First KF Loan Agreement

As a condition precedent to the advance of funds under the Second KF Loan Agreement, we have also agreed to further amend our first loan agreement with KFBV for $2,000,000, entered into on January 15, 2014 and as amended on March 10, 2014 (as amended, the “First KF Loan Agreement”).  We expect to enter into this second amendment to the First KF Loan Agreement (the “Second Amendment Agreement”) on or before September 1, 2014 in connection with the advance of funds under the Second KF Loan Agreement. Under the proposed terms of the Second Amendment Agreement, the maturity date for the outstanding amounts payable under the First KF Loan Agreement will be extended to January 15, 2016.  As consideration for this extension, we will agree to (1) extend the expiry date for 2,450,000 of the warrants previously issued to KFBV under the First KF Loan Agreement from January 15, 2015 to January 15, 2016; (2) amend the exercise price for all 6,904,546 warrants previously issued to KFBV under the First KF Loan Agreement from $1.00 per share to $0.50 per share; and (3) issue to KFBV additional warrants for the purchase of up to 2,350,000 shares of our common stock at an initial exercise price of $0.50 per share and expiring on January 15, 2019, with cashless exercise rights for up to 1,175,000 shares.

Additional details for the Second KF Loan Agreement and the First KF Loan Agreement are provided in our Current Reports on Forms 8-K, filed on August 1, 2014, March 12, 2014 and on February 18, 2014.

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RESULTS OF OPERATIONS

Revenues

During the three months ended June 30, 2014, our revenue consisted of the royalties paid to us by WebTech Wireless (“WebTech”) pursuant to our agreement with WebTech, which is scheduled to terminate on October 31, 2015. The revenue was comparable to that we received for the three months period ended June 30, 2013.

Our revenue increased by $14,834 from $13,976 for the six months ended June 30, 2013, to $28,810 for the six months ended June 30, 2014. The increase in revenue was the result of revenues received from ship surveys for possible installation of our DSOX Systems. Our royalty revenue from our agreement with WebTech was comparable to revenue we received during the six months ended June 30, 2013.

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Operating Expenses

During the three months ended June 30, 2014, our operating expenses increased by $1,763,441 or 619.3% from $284,758 for the three months ended June 30, 2013, to $2,048,199 for the three months ended June 30, 2014.  

During the six months ended June 30, 2014, our operating expenses increased by $2,153,074 or 313.6% from $686,560 for the six months ended June 30, 2013, to $2,839,634 for the six months ended June 30, 2014.  

The increases in our operating expenses for the three and six month periods ended June 30, 2014, as compared to our operating expenses for the same period in 2013, relate primarily to the continuous development of our DSOX Systems and increased development and marketing costs associated with those efforts. The most significant year-to-date changes were as follows:

·

During the six months ended June 30, 2014, we incurred $31,644 in salary and wage expenses as opposed to $207,793 in salary and wage expenses incurred during the six months ended June 30, 2013. Salaries and expenses for the six months ended June 30, 2013 included $180,000 plus applicable employment taxes paid as a signing bonus in connection with the Norling Employment Agreement, which became effective on February 6, 2013. Under the terms of the Norling Employment Agreement, during the six months ended June 30, 2014, Mr. Norling was paid a salary of $15,000 per month (plus applicable employment taxes) for a period of two months, and until the Norling Employment Agreement was terminated on March 10, 2014. Beginning March 10, 2014, Mr. Norling acts under the terms of a Management Consulting Agreement, and receives $22,500 per month which is recorded as part of management fees.  

·

Our amortization expense for the six months ended June 30, 2014, increased by 951.4% or $1,388,590 relative to the six months period ended June 30, 2013. The increase resulted from amortization of the Emission Abatement Technologies that we acquired on March 10, 2014 as a result of our Technology Transfer Agreement with Mr. Norling. The Emission Abatement Technologies were valued at $52,380,000 and are amortized over ten year useful life on a straight line basis.

·

Due to increased business activity, we felt it was necessary to acquire director’s and officer’s liability insurance, which resulted in an additional cost to our operations of $51,627, which we incurred during the six month period ended June 30, 2014. In order to comply with our agreements for the installation and servicing of the DSOX Systems we also acquired Marine and Workers Compensation insurance, which resulted in extra costs of $6,766 during the same period.

·

During the six months ended June 30, 2014, our travel and entertainment as well as advertising and marketing expenses increased by $49,714, $99,800, and $47,600, respectively, relative to the same period in fiscal 2013. The increases were associated with the need to bring awareness about our new emission abatement technologies to the general public and prospective investors. To support our marketing efforts we saw it necessary to overhaul our corporate web site, which resulted in an increase to our web design and maintenance costs of $50,748, as compared to the six months period ended June 30, 2013.

·

During the six months ended June 30, 2014, our administrative, consulting and management fees increased by $70,000, $392,092 and $202,500, respectively. These increases were partially associated with the increased work load that we experienced due to the change in our business model and the need to restructure certain operations. Changes to our management fees also include the effects of terminating the Norling Employment Agreement and instead entering into a Management Consulting Agreement with Mr. Norling, which pays Mr. Norling a management fee of $22,500 per month. Changes to our consulting fees included a severance payment of $252,000, which we made to Brad Eckenweiler upon his resignation as our Chief Executive Officer and director on May 16, 2014.

7

·

Advancement of our projects and general increase in operations resulted in increase to our professional fees of $92,795, which grew from $65,921incurred during the six months ended June 30, 2013 to $158,716 incurred during the six months ended June 30, 2014.

·

In July of 2013 we entered into two separate operating lease agreements for an additional office as well as warehouse and testing facility. In connection with these new leases, we paid $34,257 in rent fees. Our office expenses increased by $25,806, from $398 we incurred during the six months ended June 30, 2013 to $26,204 we incurred during the six months ended June 30, 2014.

·

During the six month period ended June 30, 2014, we entered into negotiations with the licensors under our Teak Shield License Agreement dated March 12, 2012 (the “Teak Shield License”) to amend the terms of the Teak Shield License. These negotiations were concluded on June 24, 2014, when we signed a Restated and Amended Licensee Agreement. As a result of these negotiations we were released from any and all obligations pursuant to the original Teak Shield License, which resulted in reversal of the royalty fees of $170,833.

Our business efforts with respect to our emission abatement technologies are currently in the development stage, and thus, as we pursue the development of our new business, we expect our operating expenses to further increase during the fiscal 2014 as compared to the prior year’s results.  In addition, because we do not have an operating history with respect to these business lines, it may be difficult for us to predict future operating expenses and capital requirements related to these businesses and our historical results are not expected to be reflective of future expenses and capital requirements.

Other Items

During the three months ended June 30, 2014, we recorded $86,824 accretion expense that resulted from the difference between stated interest rate and implied interest rate we used to determine the fair value of the proceeds we received pursuant to the First KF Loan Agreement. Our net loss was further increased by $150,000 impairment charge on the loans to our former subsidiary, New World Technologies Group, Inc.

Our interest expense increased by $42,260, or 85.9% from $49,184 for the three months ended June 30, 2013, to $91,444 for the three months ended June 30, 2014; this increase resulted from the additional debt load associated with our current business activities.

During the six months ended June 30, 2014, we recorded $136,313 accretion expense that resulted from the difference between stated interest rate and implied interest rate we used to determine the fair value of the proceeds we received pursuant to the First KF Loan Agreement. During the same period, we recorded $9,677,730 in non-cash consulting fees associated with the fair value of the warrants to acquire up to 10,000,000 shares of our Common Stock that we issued to Mr. Norling as part of his Management Consulting Agreement with us. In addition, we recorded a $150,000 impairment charge on the loans to our former subsidiary, New World Technologies Group, Inc. We had no such transactions during the six months ended June 30, 2013.

Our interest expense increased by $64,732, or 71.7% from $90,328 for the six months ended June 30, 2013, to $155,060 for the six months ended June 30, 2014; this increase resulted from the additional debt load associated with our current business activities.

8

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

As of June 30, 2014, we had a cash balance of $1,195,234, a working capital deficit of $2,091,839 and cash flows used in operations of $927,038 for the six months then ended. During the six months ended June 30, 2014, we funded our operations with $1,944,286 in loans and advances received during this period, $975,000 we received as deposit for the sale of a DSOX System pursuant to our Purchase and Services Agreement with DCL and, to the minor extent, with the cash we received from royalties and ship survey fees.

Cash Flows

Net Cash Used in Operating Activities

Net cash used in operating activities during the six months ended June 30, 2014, was $927,038. This cash was primarily used to cover our operating loss of $12,929,927 and increase our work in progress by $741,511, which was associated with payments we made to our contractors for the manufacturing of the first DSOX System as well as acquire necessary parts and equipment. In addition we used $31,261 to reduce the amounts due to related parties and $142,801 to reduce our accrued liabilities, which were in part associated with the reversal of royalty fees payable for the Teak Shield License. These uses of cash were offset by $975,000 we received as a deposit for the Purchase and Services Agreement with DCL. The uses of cash were further offset by  decrease in prepaid expenses of $68,072, increases in our accounts payable of $324,723 and increase in interest accrued on the notes and advances payable of $155,060.

Net cash used by operating activities during the six months ended June 30, 2013, was $75,831. This cash was primarily provided by $350,000 we received as deposits for future installations of our DSOX Systems and was offset by our operating loss of $762,912 and a $142,600 decrease in amounts due to related parties. Cash from operations was also provided by a decrease in advances of $80,000, increases in accounts payable of $39,834, accrued liabilities of $52,324, and accrued interest on notes and advances payable of $89,712.

Non-cash transactions

During the six months ended June 30, 2014, our net loss was affected by the following items that did not have any impact on cash used in operations: $136,313 accretion expense that resulted from the difference between stated interest rate and implied interest rate we used to determine the fair value of the proceeds we received pursuant to the First KF Loan Agreement; $9,677,730 in non-cash consulting fees associated with the fair value of the warrants to purchase up to 10,000,000 shares of our common stock we issued to Mr. Norling as part of his Management Consulting Agreement with us, and $1,534,549 in amortization expense we recorded on our intangible assets as well as testing and laboratory equipment. In addition, we recorded an obligation to issue shares for web design services totalling $46,410.

9

During the six months ended June 30, 2013 we recorded a non-cash item of $145,959 for amortization of the Teak Shield License and $45,000 for web site design services.

Net Cash Provided by Financing Activities

During the six months ended June 30, 2014, we received $2,000,000 from KF Business Ventures LP pursuant to our First KF Loan Agreement. In addition, we received an advance for the total of CAD$50,000 ($48,286) from an unrelated party. These financing activities were reduced by $104,000 we paid to partially reduce interest we owed under the Acamar Loan Agreement we entered into on April 19, 2012.

In addition, subsequent to our second fiscal quarter, we entered into the Second KF Loan Agreement with KFBV for additional $2,400,000.  See “Recent Corporate Developments.”

During the six months ended June 30, 2013, we received $194,835 in loans from unrelated parties.

Going Concern

The notes to our interim consolidated financial statements at June 30, 2014, disclose our uncertain ability to continue as a going concern. We were in the business of selling, marketing, distributing and installing global wireless tracking and telematics equipment in Europe until November 1, 2004, when we exchanged our rights to sell, market, distribute and install global wireless tracking and telematics equipment in Europe as well as specific assets and liabilities, for a royalty of 6% on future gross sales to qualified customers in Europe. This royalty agreement ends on October 31, 2015, which will end the revenue from this source. Our Teak Shield contract has not generated any revenue. Our emission abatement technologies have begun to generate revenue only recently.  To date revenue related to these technologies has been limited to conducting surveys on ships for the potential installation.

We have accumulated a deficit of $17,417,343 since inception and increased sales will be required to fund and support our operations. We plan to mitigate our losses in future years by controlling our operating expenses and actively seeking contracts for our emission abatement technologies. As of the date of this report we signed contracts to install five DSOX-15 Systems on ships.  The agreements provide for the potential installation of up to 57 additional DSOX-15 Systems. We plan to upgrade all installations to our more advanced system – the DSOX-20 System. Despite our current contracts, we cannot provide assurance that we will be successful in generating additional sales. In addition, we have not yet recorded revenues from the sale of any DSOX Systems, and there is no assurance that we will be able to record such revenues in the future.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

An appreciation of our critical accounting policies is necessary to understand our financial results. These policies may require management to make difficult and subjective judgments regarding uncertainties, and as a result, such estimates may significantly impact our financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. Other than our accounting for our royalty revenue, our critical accounting policies do not involve the choice between alternative methods of accounting. We have applied our critical accounting policies and estimation methods consistently.

Revenue Recognition

Royalty revenue

Royalty revenue is recognized when pervasive evidence of an agreement exists, when it is received or when the royalty income is determinable and collectability is reasonably assured.

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Survey revenue

Revenue is realized when the service has been provided and the income is determinable and collectability is reasonably assured.

Accounts Receivable

Receivables represent valid claims against debtors for services and royalties arising on or before the balance sheet date and are reduced to their estimated net realizable value.  An allowance for doubtful accounts is based on an assessment of the collectability of all past due accounts. At June 30, 2014, and December 31, 2013, our allowance for doubtful accounts was $0.

Foreign Exchange Risk

We are subject to foreign exchange risk on our royalty revenue and some purchases which are denominated in Canadian dollars. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the U.S. dollar.  Foreign exchange rate fluctuations may adversely impact our results of operations as exchange rate fluctuations on transactions denominated in currencies other than our functional currency result in gains and losses that are reflected in our Statement of Operations. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions will result in increased net revenue. Conversely, our net revenue will decrease when the U.S. dollar strengthens against foreign currencies. We do not believe that we have any material risk due to foreign currency exchange.

Fair Value of Financial Instruments

Our financial instruments include cash, accounts receivable, accounts payable and accrued liabilities. We believe the fair values of these financial instruments approximate their carrying values due to their short maturities.

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and trade accounts receivable.

At June 30, 2014, we had $1,195,234 in cash on deposit with a large chartered Canadian bank and a large US bank; $861,750 of this cash was insured.  As part of our cash management process, we perform periodic evaluations of the relative credit standing of these financial institutions.  We have not experienced any losses in cash balances and do not believe we are exposed to any significant credit risk on our cash.

Accounts receivable are not collateralized and consist of royalties and survey income.  We continually monitor the financial condition of our customers to reduce the risk of loss. We routinely assess the financial strength of our sources of revenue and as a consequence, concentration of credit risk is limited. At June 30, 2014, we had $3,993 in accounts receivable outstanding.

Recent Accounting Standards and Pronouncements

Recent accounting pronouncements issued by the Financial Accounting Standards Board or other authoritative standards groups with future effective dates are either not applicable or are not expected to be significant to our financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

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ITEM 4. CONTROLS AND PROCEDURES.

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of June 30, 2014. Based on the evaluation, our management concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

During the quarter ended June 30, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS.

None.

ITEM 1A.         RISK FACTORS.

The following are certain risk factors that could affect our business, financial position, results of operations or cash flows. These risk factors should be considered along with the forward-looking statements contained in this Quarterly Report on Form 10-Q because these factors could cause our actual results or financial condition to differ materially from those projected in forward-looking statements. The following discussion is not an all-inclusive listing of risks, although we believe these are the more material risks that we face. If any of the following occur, our business, financial position, results of operations or cash flows could be negatively affected. We caution the reader to keep these risk factors in mind and refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this Quarterly Report.

Risk Factors Associated with our Emission Abatement Technologies Line of Business

We have earned only limited revenues from the sale of products or services related to the DSOX Systems and other Technologies.

Our current principal business focus is on the research, development and marketing of products and services related to the DSOX Technology.  However, our efforts in this area are in the development stage and we have earned only limited revenues related to these products. There is also no assurance that we will be able to earn revenues from this businesses line in the future.

Although we have entered into sales contracts for our DSOX Systems, we have not yet completed the installation of any of the systems contracted for.

Although we have entered into sales contracts with LMS Ship Management Inc. (“LMS”), Prestige Cruise Holdings Inc. (“Prestige”) and Magical Cruise Company, Limited (“DCL”) for the installation of our DSOX Systems, we have not yet completed the installation of any systems on board any ships and have not yet recorded revenue from the sale of these products.  In June 2014, we commenced installation of our first DSOX System at LMS’ on-shore facilities located in Mobile, Alabama, which is currently ongoing. We have not yet completed the delivery or installation of any DSOX Systems to Prestige or DCL.  Once installed, there is no assurance that the emission abatement systems installed by us will obtain certification under current MEPC standards.

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Flag Ship Approval under Regulation 4 of Marpol Annex VI is made on a ship by ship basis.

The approval of the scrubber installation is made on a ship by ship basis and it is very difficult to receive a Type Approval for the system prior to installation. While our Exhaust Scrubber is the only scrubber to have received Type Approval for large gas turbine engines, we cannot guarantee that it will receive Type Approval on future installations.  Failure to receive Type Approval on future installations could have a significant material impact on the financial results of our Company.

Changes in government policies, regulations and laws could adversely affect our financial results.

We expect the majority of our future revenue to come from sales of our DSOX Systems, which are heavily dependent on current and future IMO Regulations being enforced by international signatories to MARPOL Annex VI.  Currently the United States, Canada and the E.U. have Emission Control Area’s (ECA) in place that apply stringent engine emission standards and fuel sulfur limits to ships that operate in these ECA’s as set under MARPOL Annex VI.  While sulfur oxide limit restrictions in these ECA’s are expected to drop, there can be no assurance that this will happen.  A change in the current and upcoming IMO regulations could have a significant material impact on our financial results.

Unforeseen complications during the installation of the DSOX System can potentially halt ships operation, which could adversely affect our sales, results of operations or cash flows, as well as increase potential for lawsuits filed against us.

Our DSOX Systems can be installed on a ship without disruption to the ship’s operations. However, if the planning and/or execution of the installation process have flaws, we can face a situation where the ship's operation has to be halted in order to complete installation. Depending on the type of the ship and its machinery, this risk can be mitigated by scheduling the operation of a different engine. However, if the alternative engine is not available, we will have no choice but to stop the operation of the ship.

We face competition from other companies who manufacture and install exhaust scrubbers or other emission abatement solutions, which could adversely affect our sales, results of operations or cash flows.

At the moment, none of our main competitors for the Exhaust Scrubber have received a full Type Approval (EPA, USCG, MEPC) for operation on commercial vessels. The scrubbers used by these competitors are limited to operating with caustic soda or in an open loop, which increases operating costs and risks due to the nature and sensitivity of the chemicals. However, should these companies get the full Type Approval or develop and introduce more enhanced technologies, we could face a decline in the market share for our Exhaust Scrubbers.

General Risk Factors

We have a lack of operating history in the fluoropolymer and the emission abatement industries and there is no assurance that our business efforts in these industries will be successful.

With our entry into the Teak Shield License Agreement, GTM Contracts, acquisition of patent application rights to the Bio Scrubber technology and development of DSOX Systems we have added to our business. Although our Board of Directors and Executive Officers have extensive business experience, they do not have experience in the fluoropolymer industry, and aside from our President and the Chief Technical Officer and our Vice President of Engineering, limited experience in the emission abatement industry. Some of our competitors may have greater experience and/or greater financial resources than we do at this time. We intend to hire experienced sales and consulting teams to market our products. However, since we have no history of earning revenue in these business lines, there is no assurance that our business efforts in these industries will prove successful.

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Inability to protect and enforce our intellectual property rights could adversely affect our financial results.

Intellectual property rights, including patents, trade secrets, confidential information, trademarks, tradenames and other forms of trade dress, are important to our business. We endeavor to protect our intellectual property rights in jurisdictions in which our products are produced or used and in jurisdictions into which our products are imported. However, we may be unable to obtain protection for our intellectual property in key jurisdictions. We have designed and implemented internal controls to restrict access to and distribution of our intellectual property. Despite these precautions, our intellectual property is vulnerable to unauthorized access through employee error or actions, theft and cybersecurity incidents, and other security breaches.

Demand for and supply of our products and services may be adversely affected by several factors, some of which we cannot predict or control, that could adversely affect our financial position, results of operations or cash flows.

The demand for our products and services could be affected by several factors, including:

·

economic downturns in the markets in which we sell our products;

·

competition from other products;

·

changes in customer preferences;

·

product obsolescence or technological changes that render our products less desirable to use or more expensive to produce;

·

changes in environmental regulations that may make our products illegal to sell and distribute in their present form;

·

inability of our supplier to obtain materials used in production due to factors such as work stoppages, shortages or supplier plant shutdowns; and

·

inability to supply products due to factors such as work stoppages, plant shutdowns or regulatory changes and exogenous factors, like severe weather.

If any of these events occur, the demand for and supply of our products and services could suffer, which could have a material adverse effect on our financial position, results of operations and cash flows.

Current and future disruptions in the global credit and financial markets could limit our access to financing, which could negatively impact our business.

Domestic and foreign credit and financial markets have experienced extreme disruption in the past three years, including volatility in security prices, diminished liquidity and credit availability, declining valuations of certain investments and significant changes in the capital and organizational structures of certain financial institutions. We are unable to predict the likely duration and severity of the continuing disruption in the credit and financial markets or of any related adverse economic conditions. These market conditions may limit our ability to access the capital necessary to grow and maintain our business. Accordingly, we may be forced to delay raising capital, issue shorter tenors than we prefer or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility. Overall, our results of operations, financial condition and cash flows could be materially adversely affected by the disruptions in the global credit and financial markets.

The global economic downturn may have a negative effect on our business and operations.

The global economic downturn has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and lower business spending, all of which may have a negative effect on our business, results of operations, financial condition and liquidity. Potential customers may be unable to fund purchases or may determine to reduce purchases or inventories or may cease to continue in business. In addition, our supplier may not be able to supply us with needed raw materials on a timely basis, may increase prices or go out of business, which could result in our inability to meet customer demand or could affect our gross margins.

14

The timing, strength or duration of any recovery in the global economic markets remains uncertain, and there can be no assurance that market conditions will improve in the near future or that our results will not continue to be materially and adversely affected. Such conditions make it very difficult to forecast operating results, make business decisions and identify and address material business risks. There can be no assurance that the economy and our operating results will continue to improve, that the economy will not experience another significant downturn. In such an event, our operating results, financial condition and business could be adversely affected.

The agreements governing our debt contain various covenants that limit our ability to take certain actions, failure to comply with which could have a material adverse effect on us.

The agreements governing our senior secured term loan contain a number of covenants that, among other things, limit our ability to: transfer or sell all or substantially all of our assets or make certain other restricted payments. Any future refinancing of the term loan is likely to contain similar restrictive covenants.

Our President the Chief Executive and Chief Technology Officer is the beneficial owner of approximately 57.9% of our common stock and will be able to exert considerable influence over our actions.

Mr. Rasmus Norling beneficially owns approximately 57.9% of the outstanding shares of our common stock. As the President, Chief Executive and Chief Technical Officer and a significant stockholder, he has the power to exert considerable influence over our actions and the outcome of matters on which our stockholders are entitled to vote including the election of directors and other significant corporate actions. The interests of Mr. Norling may be different from the interests of our shareholders.

The loss of key members of our senior management team could disrupt the management of our business.

We believe that our success depends on the continued contributions of the members of our senior management team, including Mr. Rasmus Norling, our President, Chief Executive and Chief Technical Officer and a principal stockholder. The loss of the services of Mr. Norling could impair our ability to identify and secure new customer contracts, to maintain good customer relationships and to otherwise manage our business, which could have a material adverse effect on our financial performance and our ability to compete.

We are subject to risks associated with selling our products internationally.

Our non-domestic sales efforts are subject to varying degrees of regulation in each of the foreign jurisdictions in which we may seek to provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions, and can change significantly over time. Future regulatory, judicial and legislative changes or interpretations may have a material adverse effect on our ability to deliver services in foreign jurisdictions.

In addition to these international regulatory risks, some of the other risks inherent in conducting business internationally include:

·

economic, political and social instability;

·

currency restrictions and exchange rate fluctuations;

·

potential submission to the jurisdiction of a foreign court or arbitration panel;

·

import and export quotas;

·

longer payment cycles and problems collecting accounts receivable;

·

potential vessel seizure, terrorist attacks, piracy, kidnapping, the expropriation of assets and other governmental acts;

·

pandemics or epidemics that disrupt worldwide trade or the movement of vessels;

·

additional U.S. and other regulation of non-domestic operations, including regulation under the Foreign Corrupt Practices Act as well as other anti-corruption laws; and

·

the imposition of unanticipated or increased taxes, increased environmental and safety regulations or other forms of public and governmental regulation that increase our operating expenses.

15

Many of these risks are beyond our control, and we cannot predict the nature or the likelihood of the occurrence or corresponding effect of any such events, each of which could have an adverse effect on our financial condition and results of operations.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to pay interest on our debt and to satisfy our other debt obligations will depend in part upon our future financial and operating performance and upon our ability to renew or refinance borrowings. Prevailing economic conditions and financial, business, competitive, legislative, regulatory and other factors, many of which are beyond our control, will affect our ability to make these payments. While we believe that cash flow from our current level of operations, available cash and available borrowings will provide adequate sources of liquidity for at least the next twelve months, a significant drop in operating cash flow resulting from economic conditions, competition or other uncertainties beyond our control could create the need for alternative sources of liquidity. If we are unable to generate sufficient cash flow to meet our debt service obligations, we will have to pursue one or more alternatives, such as, reducing or delaying capital or other expenditures, refinancing debt, selling assets, or raising equity capital.

We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including our term loan and revolving credit facility, on commercially reasonable terms or at all.

Because our stock is a penny stock, stockholders will be more limited in their ability to sell their stock.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or quotation system.

Because our securities constitute "penny stocks" within the meaning of the rules, the rules apply to us and to our securities. The rules may further affect the ability of owners of shares to sell our securities in any market that might develop for them. As long as the quotation price of our common stock is less than $5.00 per share, the common stock will be subject to Rule 15g-9 under the Exchange Act. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that:

·

contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;

·

contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of securities laws;

·

contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price;

·

contains a toll-free telephone number for inquiries on disciplinary actions;

·

defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and

·

contains such other information and is in such form, including language, type, size and format, as the SEC shall require by rule or regulation.

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On March 10, 2014, we issued non-transferrable share purchase warrants for an aggregate of 10,000,000 shares of our common stock for an initial exercise price of $1.00 per share for a period of three years to our President and Chief Technical Officer, Rasmus Norling.   These warrants were issued pursuant to the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), on the basis that Mr. Norling is a director and executive officer of the Company.  

Between January 15, 2014 and March 10, 2014, we issued non-transferrable share purchase warrants for an aggregate of 6,904,546 shares of our common stock with an initial exercise price of $1.00 per share to KF Business Ventures, LP. (“KFBV”). On July 28, 2014 we entered into the Second KF Loan Agreement with KFBV.  As a condition precedent to the advance of funds under the Second KF Loan Agreement, we intend to enter into an agreement to amend the First KF Loan Agreement (the Second Amendment Agreement to the First KF Loan Agreement), pursuant to which, we will agree to (1) extend the expiry date for 2,450,000 of the warrants previously issued to KFBV under the First KF Loan Agreement from January 15, 2015 to January 15, 2016; (2) amend the exercise price for all 6,904,546 warrants previously issued to KFBV under the First KF Loan Agreement from $1.00 per share to $0.50 per share; and (3) issue to KFBV additional warrants for the purchase of up to 2,350,000 shares of our common stock at an initial exercise price of $0.50 per share and expiring on January 15, 2019, with cashless exercise rights for up to 1,175,000 shares. We expect to enter into the Second Amendment Agreement to the First KF Loan Agreement on or before September 1, 2014 in connection with the advance of funds under the Second KF Loan Agreement.  See “Recent Corporate Developments” in Item 2 of Part I of this Quarterly Report on Form 10-Q.

Under the Second KF Loan Agreement, we have also agreed to issue to KFBV additional warrants to purchase up to 9,600,000 shares of our common stock, exercisable at a price of $0.50 per share for a period expiring September 1, 2019, with cashless exercise rights for up to 4,800,000 shares.  These warrants are in addition to the warrants that we expect to issue to KFBV under the Second Amendment Agreement to the First KF Loan Agreement.  See “Recent Corporate Developments” in Item 2 of Part I of this Quarterly Report on Form 10-Q.

The offer and sale of the above warrants to KFBV were made, and are expected to be made, pursuant to the exemptions from the registration requirements of the Securities Act of 1933 provided by Rule 506 of Regulation D on the basis of representations provided by KFBV that it is an “accredited investor” as defined in Regulation D.

Other than the sales mentioned above there were no other unregistered sales of securities during the six months period ended June 30, 2014 that would be required to be disclosed pursuant to Item 701 of Regulation S-K.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.  OTHER INFORMATION.

None.

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ITEM 6.  EXHIBITS.

All Exhibits required to be filed with this Quarterly Report on Form 10-Q are included in this Quarterly Report or incorporated by reference to our previous filings with the SEC, which can be found in their entirety at the SEC website at www.sec.gov under SEC File Number 000-33309 and 333-66590.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, Poly Shield Technologies Inc. has caused this report to be signed on their behalf by the undersigned duly authorized persons.

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