Attached files

file filename
EX-31.01 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13A-14 - Ocean Thermal Energy Corpex3101q063014.htm
EX-32.01 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER) - Ocean Thermal Energy Corpex3201q063014.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
   
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ___________
   
Commission File Number 033-19411-C
 
TetriDyn Solutions, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
20-5081381
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
800 South Queen Street, Lancaster, PA  17603
(Address of principal executive offices, including zip code)
 
(717) 715-0238
(Registrant’s telephone number, including area code)
 
n/a
(Former name, former address and former fiscal year, if changed since last report)

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

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

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 filer o
Accelerated filer ¨
Non-accelerated filer o
Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 28, 2015, issuer had 53,404,140 outstanding shares of common stock, par value $0.001.
 
 

 

TABLE OF CONTENTS


Item
Description
Page
     
 
Special Introductory Note—August 2015
3
     
 
PART I–FINANCIAL INFORMATION
 
Item 1
Financial Statements
4
 
Condensed Consolidated Balance Sheets (Unaudited)
4
 
Condensed Consolidated Statements of Operations (Unaudited)
5
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
6
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
7
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3
Quantitative and Qualitative Disclosures about Market Risk
21
Item 4
Controls and Procedures
21
     
 
PART II–OTHER INFORMATION
 
Item 3
Defaults upon Senior Securities
23
Item 6
Exhibits
23
 
Signature
24

2
 
 

 

SPECIAL INTRODUCTORY NOTE
August 2015

The following Quarterly Report on Form 10-Q provides information as of June 30, 2014, and for the six months then ended, without giving effect to the matters set forth in Note 10 under the caption “Subsequent Events.”

This report is being filed in August 2015 in conjunction with our filing, at or about the same time, of our:

w
Quarterly Report on Form 10-Q for the quarter ended September 30, 2012;
w
Annual Report on Form 10-K for the year ended December 31, 2012;
w
Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2013;
w
Annual Report on Form 10-K for the year ended December 31, 2013;
w
Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2014;
w
Annual Report on Form 10-K for the year ended December 31, 2014; and
w
Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.

You should read all of the foregoing reports and may rely on the Annual Report on Form 10-K for the year ended December 31, 2014; the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015; and any Current Reports on Form 8-K for a description of current operations.
 
3
 
 

 

PART I–FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TETRIDYN SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
             
    June 30,   December 31,
    2014   2013
    (Unaudited)      
ASSETS
           
   Current Assets
         
      Cash
 
              220
 
       11,458
      Accounts receivable
 
                   -
   
             1,960
   Total Current Assets
 
               220
   
           13,418
   Property and Equipment, net
 
                   -
   
             2,701
Total Assets
            220
 
       16,119
             
LIABILITIES
           
   Current Liabilities
         
      Accounts payable
      444,633
 
      448,438
      Accrued liabilities
 
         334,659
   
         315,310
      Customer deposits
 
             6,473
   
             8,487
      Notes payable, current portion
 
         282,824
   
         273,822
      Convertible note payable to related party, current portion
 
         320,246
   
         320,246
   Total Current Liabilities
 
       1,388,835
   
       1,366,303
   Long-Term Liabilities
         
      Notes payable, net of current portion
 
           16,788
   
           25,790
   Total Long-Term Liabilities
 
           16,788
   
           25,790
Total Liabilities
   
       1,405,623
   
       1,392,093
             
COMMITMENTS AND CONTINGENCIES (See Note 8)
         
             
STOCKHOLDERS' DEFICIT
         
   Preferred stock - $0.001 par value
         
      Authorized:
5,000,000 shares
         
      Issued and outstanding:
1,200,000 shares and
         
 
1,200,000 shares, respectively
 
             1,200
   
             1,200
   Common stock - $0.001 par value
         
      Authorized:
100,000,000 shares
         
      Issued and outstanding:
24,031,863 shares and
         
 
24,031,863 shares, respectively
 
           24,032
   
           24,032
   Additional paid-in capital
 
       3,018,497
   
       3,001,752
   Accumulated deficit
 
     (4,449,132)
   
     (4,402,958)
Total Stockholders' Deficit
 
     (1,405,403)
   
     (1,375,974)
             
Total Liabilities and Stockholders' Deficit
            220
 
       16,119
             
See the accompanying notes to condensed consolidated unaudited financial statements.
 
4
 
 

 
 
TETRIDYN SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                         
    For the Three Months Ended For the Six Months Ended
    June 30,   June 30,
    2014   2013   2014   2013
Revenue
 
         691
 
   27,453
 
    4,971
 
 105,098
Cost of Revenue
   
              -
   
        4,817
   
        3,099
   
      30,967
Gross Profit
   
          691
   
      22,636
   
        1,872
   
      74,131
Operating Expenses
                       
   General and administrative
   
        2,413
   
      26,666
   
      19,601
   
      75,959
   Professional fees
   
          713
   
      11,267
   
        1,570
   
      15,558
   Selling and marketing
   
              -
   
        1,176
   
              -
   
        5,347
   Research and development
   
              -
   
      19,860
   
          341
   
      46,157
Total Operating Expenses
   
        3,126
   
     58,969
   
      21,512
   
    143,021
Net Loss from Operations
   
      (2,435)
   
     (36,333)
   
     (19,640)
   
     (68,890)
Other Expenses
                       
   Interest Expense
   
     (13,297)
   
     (12,541)
   
     (26,534)
   
     (39,454)
Total Other Expenses
   
     (13,297)
   
     (12,541)
   
     (26,534)
   
     (39,454)
Net Loss before Provision for Income Taxes
   
     (15,732)
   
     (48,874)
   
     (46,174)
   
   (108,344)
Provision for Income Taxes
   
              -
   
              -
   
              -
   
              -
Net Loss
 
  (15,732)
 
  (48,874)
 
 (46,174)
 
(108,344)
                         
Total Basic and Diluted Loss Per Common Share
 
         -
 
         -
 
         -
 
         -
                         
Basic and Diluted Weighted-Average
                       
   Common Shares Outstanding
   
24,031,863
   
24,031,863
   
24,031,863
   
23,569,497
                         
See the accompanying notes to condensed consolidated unaudited financial statements.
 
5
 
 

 
 
TETRIDYN SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
           
  For the Six Months Ended
  June 30,
  2014   2013
Cash Flows from Operating Activities
         
Net Loss
          (46,174)
 
      (108,344)
Adjustments to reconcile net loss to net cash used in operating activities:
         
   Depreciation
 
                2,701
   
                3,083
   In-kind contribution of rent
 
                4,350
   
                8,700
   In-kind contribution of executive salaries
 
              12,394
   
              41,313
   Common stock issued for services
 
                        -
   
              20,000
Changes in operating assets and liabilities:
         
   Accounts receivable
 
                1,960
   
              11,873
   Prepaid expenses
 
                        -
   
                1,017
   Accrued expenses
 
              19,349
   
                8,266
   Accounts payable
 
              (3,804)
   
              19,747
   Customer deposits
 
              (2,014)
   
              (5,010)
Net Cash Provided by (Used in) Operating Activities
 
            (11,238)
   
                   645
Cash Flows from Financing Activities
         
Principal payments on notes payable
 
                        -
   
                 (645)
Principal payments on related party convertible note payable
 
                        -
   
                 (254)
Net Cash Used in Financing Activities
 
                        -
   
                 (899)
Net Decrease in Cash
 
            (11,238)
   
                 (254)
Cash at Beginning of Period
 
              11,458
   
                   857
Cash at End of Period
               220
 
               603
           
Supplemental Disclosure of Cash Flow Information:
         
Cash paid for income taxes
                    -
 
                    -
Cash paid for interest expense and lines of credit
             7,066
 
          22,083
           
 
See the accompanying notes to condensed consolidated unaudited financial statements.
 
6
 
 

 
 
TETRIDYN SOLUTIONS, INC., AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 1–Nature of Business and Basis of Presentation

TetriDyn Solutions, Inc. (the “Company”), specializes in providing business information technology (IT) solutions to its customers. The Company optimizes business and IT processes by using systems engineering methodologies, strategic planning, and system integration to add efficiency and value to its customers’ business processes and to help its customers identify critical success factors in their business.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information necessary for a comprehensive presentation of financial position and results of operations.

It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made that are necessary for a fair financial statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year. The interim condensed consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2013, including the financial statements and notes thereto.

Note 2–Organization and Summary of Significant Accounting Policies

Principles of Consolidation–The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, an Idaho corporation also named TetriDyn Solutions, Inc. Intercompany accounts and transactions have been eliminated in consolidation.

Business Segments–The Company had only one business segment for the three and six months ended June 30, 2014 and 2013.

Use of Estimates–In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates.

Cash and Cash Equivalents–For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

Revenue Recognition–Revenue from software licenses, related installation, and support services is recognized when earned and realizable. Revenue is earned and realizable when persuasive evidence of an arrangement exists; services, if requested by the customers, have been rendered and are determinable; and collectability is reasonably assured. Amounts received from customers before these criteria being met are deferred. Revenue from the sale of software is recognized when delivered to the customer or upon installation of the software if an installation contract exists. Revenue from post-contract support service is recognized as the services are provided, which is determined on an hourly basis. The Company recognizes the revenue received for unused support hours under support service contracts that have had no support activity after two years. Revenue applicable to multiple-element fee arrangements is divided among the software, the installation, and post-contract support service contracts using vendor-specific objective evidence of fair value, as evidenced by the prices charged when the software and the services are sold as separate products or arrangements.
 
7
 
 

 


The Company had four customers that represented more than 10% of sales for either the three- or six-month periods ended June 30, 2014, and the Company had three customers that represented more than 10% of sales for either the three- or six-month periods ended June 30, 2013, as follows:

 
Three Months Ended
June 30, 2014
Six Months Ended
June 30, 2014
Three Months Ended
June 30, 2013
Six Months Ended
June 30, 2013
         
Customer A
75%
10%
--
--
Customer B
--
26%
--
--
Customer C
24%
--
--
--
Customer D
--
60%
22%
12%
Customer E
--
--
33%
27%
Customer F
--
--
28%
27%

Going Concern–The accompanying unaudited condensed consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern. As reflected in the accompanying condensed consolidated financial statements, the Company had a net loss of $15,732 and $46,174 for the three and six months ended June 30, 2014, respectively. The Company used $11,238 of cash in operating activities for the six months ended June 30, 2014. The Company had a working capital deficiency of $1,388,615 and a stockholders’ deficit of $1,405,403 as of June 30, 2014. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on its ability to increase sales and obtain external funding for its product development. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Income Taxes–The Company accounts for income taxes under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10-25, Income Taxes. Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Fair Value of Financial InstrumentsASC 820, Fair Value Measurements and Disclosures, requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

Level 1
 
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
     
Level 2
 
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
     
Level 3
 
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 
8
 
 

 
 
The Company’s financial instruments consist of accounts receivable, prepaid expenses, accounts payable, accrued liabilities, customer deposits, notes payable, and related-party convertible note payable. Pursuant to ASC 820, Fair Value Measurements and Disclosures, and ASC 825, Financial Instruments, the fair value of the Company’s cash equivalents is determined based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. The Company believes that the recorded values of all of the other financial instruments approximate fair value due to the relatively short period to maturity for these instruments.

Property and Equipment–Property and equipment are recorded at cost. Maintenance, repairs, and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Property and equipment are depreciated using the straight-line method over the estimated useful life of the asset, which is set at five years for computing equipment and vehicles and seven years for office equipment. Gains or losses on dispositions of property and equipment are included in the results of operations when realized.

Net Loss per Common Share–Basic and diluted net loss per common share are computed based upon the weighted-average stock outstanding as defined by FASB ASC 260, Earnings Per Share. As of June 30, 2014 and 2013, 0 and 2,018,000, respectively, of common share equivalents for granted stock options were antidilutive and not used in the calculation of diluted net loss per share. Additionally, as of June 30, 2014 and 2013, 38,761,100 and 32,024,600, respectively, of common share equivalents for convertible note payables were antidilutive and not used in the calculation of diluted net loss per share.

Stock-Based Compensation–On June 17, 2009, at the Company’s annual shareholders meeting, the Company’s shareholders approved the 2009 Long-Term Incentive Plan under which up to 4,000,000 shares of common stock may be issued. The 2009 plan is to be administered either by the board of directors or by the appropriate committee to be appointed from time to time by the board of directors. Awards granted under the 2009 plan may be incentive stock options (“ISOs”) (as defined in the Internal Revenue Code), appreciation rights, options that do not qualify as ISOs, or stock bonus awards that are awarded to employees, officers, and directors who, in the opinion of the board or the committee, have contributed or are expected to contribute materially to the Company’s success. In addition, at the discretion of the board of directors or the committee, options or bonus stock may be granted to individuals who are not employees, officers, or directors, but contribute to the Company’s success.

Equity instruments issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB ASC 505, Share-Based Payment. Emerging Issues Task Force, or EITF, Issue 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, defines the measurement date and recognition period for such instruments. In general, the measurement date is when either: (a) a performance commitment, as defined, is reached; or (b) the earlier of: (i) the nonemployee performance is complete; or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the EITF.

Effective January 1, 2006, the Company adopted the provisions of FASB ASC 505, Share-Based Payment, for its stock-based compensation plan. Under FASB ASC 505, all employee stock-based compensation is measured at the grant date, based on the fair value of the option or award, and is recognized as an expense over the requisite service period, which is typically through the date the options or awards vest. The Company adopted FASB ASC 505 using the modified prospective method. Under this method, for all stock-based options and awards granted before January 1, 2006, that remain outstanding as of that date, compensation cost is recognized for the unvested portion over the remaining requisite service period, using the grant-date fair value measured under the original provisions of FASB ASC 505 for pro forma and disclosure purposes. Furthermore, compensation costs will also be recognized for any awards issued, modified, repurchased, or cancelled after January 1, 2006.
 
9
 
 

 

Note 3–Recent Accounting Pronouncements

In June 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35, Revenue Recognition–Construction-Type and Production-Type Contracts. The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. This updated guidance is not expected to have a material impact on the Company’s results of operations, cash flows, or financial condition.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, to simplify presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance costs. For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on its results of operations, cash flows, or financial condition.

In April 2015, the FASB issued ASU No. 2015-05, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If such an arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for it as a service contract. For public business entities, the ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on its results of operations, cash flows, or financial condition.

All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
 
10
 
 

 

Note 4–Investments

As of June 30, 2014 and December 31, 2013, the Company had an approximately 40% minority interest in an entity that is developing electronic livestock tracking systems. The Company has no management or financial control over this entity and therefore accounted for the investment using the cost method. The value of the investment was $0 as of June 30, 2014 and December 31, 2013, as determined based on Level 3 inputs (see Note 10).

Note 5–Accounts Payable and Accrued Liabilities

As of June 30, 2014, the Company had $444,633 in accounts payable, $354,974 of which was due on multiple revolving credit cards under the name of the Company’s former chief executive officer (now deceased) or the name of the Company's current president. These amounts represent advances to the Company from funds borrowed on credit cards in the names of these officers as an accommodation to the Company at a time when it was unable to obtain advances on its own credit. The obligations bear varying rates of interest between 5.25% and 29.99%. The Company agreed to reimburse the former chief executive officer and the current president for these liabilities (see Note 10).

As of June 30, 2014, the Company had $334,659 in accrued liabilities. The accrued liabilities included $213,436 that represents unpaid salaries, including accrued payroll taxes, for two of its officers.

Note 6–Convertible Notes Payable to Related Parties

In 2010, the Company borrowed $150,000 in three separate loans from two of its officers and directors, repayable pursuant to various convertible promissory notes. The terms of the notes are as follows: (a) no interest will accrue if the note is repaid within 60 days; (b) if the note is not repaid within 60 days, the Company is obligated to pay 10% for costs associated with securing the funds; (c) if the loan is repaid within one year, no annual interest rate will be charged; however, if the loan is not repaid within one year, the note will accrue interest at 6% per annum, beginning on the one-year anniversary date of the note; (d) the lenders are authorized to convert part or all of the note balance and accrued interest, if any, into the Company’s common stock at its fair value at any time while the note is outstanding; and (e) the loan’s due date for full repayment is December 31, 2013. Since the loans were not paid within 60 days, the Company is obligated to pay $15,000 for costs associated with securing the funds and accrued interest. The notes were not paid when due.

In 2011, the Company borrowed $125,000 in five separate loans from two of its officers and directors, repayable pursuant to various convertible promissory notes. The terms of the notes are as follows: (a) no interest will accrue if the note is repaid within 60 days; (b) if the note is not repaid within 60 days, the Company is obligated to pay 10% for costs associated with securing the funds; (c) if the loan is repaid within one year, no annual interest rate will be charged; however, if the loan is not repaid within one year, the note will accrue interest at 6% per annum, beginning on the one-year anniversary date of the note; (d) the lenders are authorized to convert part or all of the note balance and accrued interest, if any, into the Company’s common stock at its fair value at any time while the note is outstanding; and (e) the loan’s due date for full repayment is December 31, 2014. Since the loans were not paid within 60 days, the Company is obligated to pay $12,500 for costs associated with securing the funds.
 
11
 
 

 

In 2012, the Company borrowed $45,500 in three separate loans from two of its officers and directors, repayable pursuant to various convertible promissory notes. The terms of the notes are as follows: (a) no interest will accrue if the note is repaid within 60 days; (b) if the note is not repaid within 60 days, the Company is obligated to pay 10% for costs associated with securing the funds; (c) if the loan is repaid within one year, no annual interest rate will be charged; however, if the loan is not repaid within one year, the note will accrue interest at 6% per annum, beginning on the one-year anniversary date of the note; (d) the lenders are authorized to convert part or all of the note balance and accrued interest, if any, into the Company’s common stock at its fair value at any time while the note is outstanding; and (e) the loan’s due date for full repayment is December 31, 2014. Since the loans were not paid within 60 days, the Company is obligated to pay $4,550 for costs associated with securing the funds.

As of June 30, 2014, the Company had $320,246 in convertible notes payable due to related parties with $67,365 in accrued interest.

Note 7–Notes Payable in Default

As of October 25, 2011, a loan from one economic development entity was in default. The loan principal was $50,000 with accrued interest of $9,414 through June 30, 2014. The Company plans to work with the entity to arrange for an extension on the loan.

As of June 30, 2014, the Company was delinquent in payments on two loans to a second economic development entity. The Company owed this economic entity $63,020 in late payments with an outstanding balance of $163,791 and accrued interest of $31,044 as of June 30, 2014. Both loans are guaranteed by two of the Company’s officers. One loan is secured by liens on intangible software assets and the other loan is secured by the officers’ personal property. The Company is working with this entity to bring the payments current as soon as cash flow permits.

As of June 30, 2014, the Company was delinquent in payments on a loan to a third economic development entity. The Company owed the third economic entity $64,070 in late payments with an outstanding balance of $85,821 and accrued interest of $12,197 as of June 30, 2014. This loan is secured by a junior lien on all the Company’s assets and shares of founders’ common stock. The Company is working with this entity to bring the payments current as soon as cash flow permits.

Note 8–Commitments and Contingencies

In March 2012, the compensation committee set the annual salary for the chief executive officer to be $50,000 through calendar year 2012 and for subsequent calendar years until otherwise modified in a subsequent compensation committee resolution.

The chief executive officer voluntarily forfeited her salary for the six months ended June 30, 2014, and contributed the services in-kind.

Note 9–Stockholder’s Deficit

One officer voluntarily forfeited her six months of salary for the period ended June 30, 2014, and contributed the services in-kind.

The Company occupied office space owned by one of the Company’s directors for the three months ended March 31, 2014. No rent was paid for the occupied office space. In-kind contribution of rent of $1,450 per month, or $4,350 for the three months, was recognized in the six months ended June 30, 2014.
 
12
 
 

 

Note 10–Subsequent Events

Credit Card Obligations

The Company was responsible for reimbursing Dave Hempstead, its chief executive officer, principal financial officer, and director, for personal credit card account expenditures on its behalf. The balance due on these credit card accounts was $261,609 as of the date of Mr. Hempstead’s death on April 26, 2013. The credit card companies have not sought collection from assets owned jointly with Mr. Hempstead’s surviving spouse, who in turn advised the Company on July 15, 2015, that she will not seek reimbursement from the Company unless the credit card companies hereafter seek payment. The full amount of this liability has been recorded and disclosed as part of accounts payable and will continue to be accrued until the statute of limitations is met.

Sale of Southfork Solutions, Inc.

On August 26, 2014, the Company sold to Southfork Solutions, Inc., the variable interest subsidiary engaged in providing IT solutions to the livestock segment, its 39% minority, nonoperating interest in Southfork Solutions for $75,000. This operation had been discontinued in 2009 (see Note 4).

Consolidation of Convertible Notes Payable to Related Parties

On March 19, 2015, the Company exchanged convertible notes payable to its officers and directors in the aggregate principal amount of $320,246, plus accrued but unpaid interest of $74,134, for an aggregate of $394,380 as of December 31, 2014, into a single, $394,380 consolidated convertible note dated December 31, 2014. The new consolidated convertible note has payment and other terms identical to the notes exchanged, except that the conversion provisions were changed from a conversion price to be equal to the stock’s fair value as of the conversion date to a fixed conversion price under the consolidated note of $0.025 per share, the approximate market price of the Company’s common stock as of the date of the issuance of the consolidated note in March 2015. The note is due and payable within 90 days after demand. See Note 6—Convertible Notes Payable to Related Parties.

2015 Investment and Merger Agreements

On March 23, 2015, the Company entered into an Investment Agreement dated March 12, 2015, with JPF Venture Group, Inc. (“JPF”) and an Agreement and Plan of Merger dated March 12, 2015 (the “Merger Agreement”) with Ocean Thermal Energy (“OTE”). Before entering into these agreements, there was no material relationship between the Company and its affiliates and either JPF or OTE and their respective affiliates.

Investment Agreement—Under the terms of the Investment Agreement, JPF purchased for $100,000 in cash 29,372,277 shares of the Company’s common stock at $0.003405 per share (the “JPF Stock”) and a warrant to purchase up to 1,033,585 shares of the Company’s common stock at an exercise price of $0.003 per share. JPF is an investment entity that is majority-owned by Jeremy P. Feakins (“Feakins”), the Chairman and Chief Executive Officer of OTE. The JPF Stock represents a 55% ownership interest by JPF in the Company, without giving effect to the issuance of additional shares of the Company’s common stock on the conversion of outstanding convertible notes.

JPF’s investment is being used principally to initiate and pursue an updated technical and commercialization review of the Company’s intellectual properties with a view toward possible broadened marketing introduction and, in general, advance the Company’s business activities and to bring its regulatory filings current. The terms of the Investment Agreement provide that, if the Merger (as defined below) with OTE is consummated, 100% of the JPF Stock will be cancelled and returned to the status of authorized and unissued shares. The purpose of this intended cancellation is to ensure that the Company’s current shareholders (excluding JPF) retain a 5% interest in the post-Merger company. If the Merger is not consummated, the JPF Stock will remain outstanding, and JPF will maintain its position as a 55% stockholder in the Company.
 
13
 
 

 

Concurrently with the execution of the Investment Agreement, Antoinette Knapp Hempstead and the estate of her late husband, David W. Hempstead (together, the “Hempsteads”), JPF, and Feakins entered into an agreement whereby, among other things: (i) JPF agreed to execute supplemental guarantees for the Hempsteads in connection with certain debt obligations to economic development entities owed by the Company and guaranteed by the Hempsteads; (ii) the Hempsteads transferred to JPF the consolidated convertible note payable by the Company to the Hempsteads with an outstanding principal balance of $394,380 as of December 31, 2014, together with accrued and unpaid payroll of $213,436, for a total of $607,816; and (iii) the Hempsteads returned to the Company for cancellation 1,200,000 shares of Series A Preferred Stock, which were cancelled. The Company has filed a Certificate of Withdrawal of Certificate of Designation for the preferred stock with the Nevada Secretary of State.

As required by the Investment Agreement, two designees of JPF, Feakins and Peter Wolfson, were appointed as directors of the Company to replace incumbent directors Orville J. Hendrickson and Larry J. Ybarrondo, who resigned. See below.

Agreement and Plan of Merger

Merger Terms. Under the terms of the Merger Agreement, the Company would acquire OTE (the “Merger”) as follows: (i) the Company would organize a wholly owned subsidiary that would merge with and into OTE, with OTE continuing as the surviving corporation and as a wholly owned subsidiary of the Company; and (ii) each share of OTE common stock outstanding or issuable on the conversion of outstanding notes and exercise of warrants (other than shares owned by stockholders who dissent to the transaction) immediately before the Merger, would be converted into the right to receive one newly issued share of the Company’s common stock in accordance with the terms and conditions of the Merger Agreement.

Conditions to Completion of Merger. The completion of the Merger would constitute the offer and sale of the Company’s securities to the stockholders of OTE, which can only be effected if a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), is effective or an exemption from registration is available. The Company has determined to seek an exemption from registration under the Securities Act by meeting the requirements of Section 3(a)(10) of this statute, which exempts from registration securities issued when the terms and conditions of such issuance are approved, after hearing upon the fairness of the terms and conditions meeting certain requirements by, among others, a duly authorized administrative agency. In an effort to meet these requirements, the Company has filed an application for a fairness hearing to be held pursuant to the provisions of Section 25142 of the California Securities Law (the “Fairness Hearing”) so that the issuance of the securities to complete the Merger will be exempt from the registration requirements of the Securities Act pursuant to the exemption provided by Section 3(a)(10) of the Securities Act.

The California application for a Fairness Hearing is now pending. The Fairness Hearing and permitting application are significant and quite technical, and the determination of whether the Merger will meet the California fairness requirements will be subject to the discretion of the hearing officer. No assurance can be given as to whether or not the hearing will result in the denial of the application, an adjustment of the terms of the Merger, the issuance of a permit meeting the conditions of the Securities Act Section 3(a)(10) exemption, or other action.

If California issues a permit availing the Company of the exemption under the Securities Act Section 3(a)(10) and the other conditions to closing the Merger are met, the Merger will be completed promptly thereafter. If California does not issue the permit or the other Merger conditions are not satisfied: (i) the Merger Agreement will terminate; (ii) the Company and OTE will remain as separate companies; and (iii) JPF will continue as the 55% controlling stockholder of the Company as it seeks to advance commercialization of its technologies or pursue other opportunities.
 
14
 
 

 


Completion of the Merger is also conditioned on the continuing accuracy of the representations and warranties of the respective parties to the Merger Agreement, the satisfaction of certain conditions, and other covenants, many of which may be waived by either party.

Reverse Split to Facilitate Merger. The Company currently has an authorized capitalization of 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. With 24.0 million shares outstanding immediately preceding the Merger, after giving effect to JPF's return of 24,031,863 shares issued under  the Investment Agreeemnt for cancellation immediately preceding the closing of the Merger, the Company does not have a sufficient number of authorized but unissued shares to convey 95% ownership of its stock to the OTE stockholders as agreed to complete the Merger, which would require the issuance of 369.9 million shares at closing and the reservation of about 86.7 shares for issuance on the conversion of outstanding notes and the exercise of outstanding warrants. Accordingly, immediately preceding the Merger, the Company will effect a 1-for-4.6972 reverse-stock-split of its common stock (the “Reverse Split”) by filing an amendment with the Nevada Secretary of State. This amendment will also increase the Company’s authorized common stock to 200,000,000 shares.

As a result of the Reverse Split, each record holder of less than 4.6972 shares of the Company’s common stock immediately before the Reverse Split (the “Minority Stockholders”) will receive, from the Company, cash in the amount of $0.03 per share of the Company’s common stock, without interest (which amount includes a 20% premium over the fair market value of $0.025 per share as of March 3, 2015, as determined by the Company’s board of directors), for each share of the Company’s common stock held immediately before the Reverse Split, and the Minority Stockholders will no longer be stockholders of the Company. Each record holder of 4.6972 or more shares of the Company’s common stock immediately before the Reverse Split will own approximately one-fifth of the number of shares of the Company’s common stock held by such stockholder immediately before the Reverse Split.

Post-Merger Business of OTE and the Company. OTE is developing deep-water hydrothermal technologies to provide renewable energy and drinkable water. OTE’s Sea Water Air Conditioning (“SWAC”) technology takes advantage of the difference between cold deep water and warmer surface water to produce hydrothermal energy without requiring fossil fuels. OTE has recently broken ground on a SWAC project at the upscale Baha Mar Resort in the Bahamas. This project, believed to be the first large-scale seawater air conditioning system in the Bahamas, is scheduled to be completed and in service in 2016.

OTE is interested in the commercial potential of proprietary technologies being developed by the Company as opportunities for future business diversification. Further, OTE recognizes that the Company’s status as a company that is subject to the periodic reporting requirements pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), may enhance its access to the capital markets to fund future projects.

After the Merger, the combined enterprise intends to continue opportunistically to develop the lines of business of both the Company and OTE as commercial opportunities are identified for one, the other, or both, after considering funding availability, potential financial returns, and related risks.

Ownership of the Company Following the Merger and Reverse Split. As a result of the Investment Agreement, JPF now owns 55% of Company’s common stock and is a principal creditor of the Company, which owes JPF pursuant to the consolidated convertible note with an outstanding principal balance of $394,380 as of December 31, 2014, and accrued and unpaid payroll of $213,436, for a total of $607,816.
 
15
 
 

 

If the Merger is completed, the JPF Stock purchased pursuant to the Investment Agreement will be cancelled and returned to the Company, and the former OTE stockholders will own 95% of the Company’s outstanding common stock (after giving effect to the exercise of OTE warrants and the conversion of OTE notes). The pre-Merger company shareholders will have a 5% interest in the post-Merger company, and the officers and directors of OTE will be the officers and directors of the post-Merger company.

Change in Directors and Management

On March 23, 2015, in connection with the Investment Agreement, Orville J. Hendrickson and Larry J. Ybarrondo resigned their positions on the Company’s board of directors, and Feakins and Peter Wolfson (as a nominee of JPF) were appointed by board consent to the Company’s board. Antoinette Knapp Hempstead, who was a board member before March 23, 2015, continues as a director. The resignations of Messrs. Hendrickson and Ybarrondo are not the result of any disagreement with the Company on any matter relating to its operations, policies, or practices.

Change of Office Location

In connection with the above transactions, in March 2015 the Company’s offices were relocated to the facilities of JPF at 800 South Queen Street, Lancaster, Pennsylvania 17603, telephone number (717) 715-0238, where it shares offices with OTE at no charge to the Company.

2015 Convertible Note Payable to Related-Party

On June 23, 2015, the Company borrowed $50,000 from its principal stockholder, JPF, pursuant to a promissory note. The terms of the note are as follows: (i) interest is payable at 6% per annum; (ii) the note is payable 90 days after demand; and (iii) payee is authorized to convert part or all of the note balance and accrued interest, if any, into shares of the Company’s common stock at their fair market value at the time of conversion. JPF is an investment entity that is majority-owned by Feakins, a director, chief executive officer, and chief financial officer of the Company.


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

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.

Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, such as statements relating to our anticipated revenues, gross margin and operating results, estimates used in the preparation of our financial statements, future performance and operations, plans for future expansion, capital spending, sources of liquidity, and financing sources. Forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include those relating to our liquidity requirements; the continued growth of the software and IT services industries; the success of our product development, marketing and sales activities; vigorous competition in the software industry; dependence on existing management; leverage and debt service (including sensitivity to fluctuations in interest rates); domestic or global economic conditions; the inherent uncertainty and costs of prolonged arbitration or litigation; and changes in federal or state tax laws or the administration of such laws.

This discussion and analysis excludes the effects of the matters described in Note 10–Subsequent Events.
 
16
 
 

 

Overview

We optimize business and IT processes by using systems engineering methodologies, strategic development, and integration to add efficiency and value to our customers’ business processes and to help our customers identify critical success factors in their business.

We provide business IT solutions to the healthcare industry. We are expanding our service offerings into selected other professional industries as those markets develop and as we develop new applications for our integrated system of radio frequency identification and software solutions for tracking, management, and diagnostic systems.

Description of Expenses

General and administrative expenses consist of salaries and related costs for accounting, administration, finance, human resources, and information systems for internal use.

Professional fees expenses consist of fees related to legal, outside accounting, auditing, market analysis, and investor relations services.

Selling and marketing expenses consist of advertising, promotional activities, trade shows, travel, and personnel-related expenses.

Research and development expenses consist of payroll and related costs for software engineers, management personnel, and the costs of materials and equipment used by these employees in the development of new or enhanced product offerings.

In accordance with FASB ASC 985, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, development costs incurred in the research and development of new software products to be sold, leased, or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated, capitalizable software development costs have not been material to date. We have charged our software development costs to research and development expense in our statements of operations.

Property and equipment are recorded at cost. Maintenance, repairs, and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Gains or losses on dispositions of property and equipment are included in the results of operations when realized.

Results of Operations

Comparison of Three and Six Months Ended June 30, 2014 and 2013

Revenues

Our revenue was $691 and $4,971 for the three and six months ended June 30, 2014, respectively, compared to $27,453 and $105,098 for the three and six months ended June 30, 2013, respectively, representing a decrease of $26,762, or 97%, and $100,127, or 95%, for the three- and six-month periods, respectively. The decrease in revenues was due to discontinuation of our services and software sales.
 
17
 
 

 

Cost of Revenue

Our cost of revenue was $0 and $3,099 for the three and six months ended June 30, 2014, respectively, compared to $4,817 and $30,967 for the three and six months ended June 30, 2013, respectively, representing a decrease of $4,817, or 100%, and $27,868, or 90%, for the three-and the six-month periods, respectively. The gross margin percentage on revenue was 100% and 38% for the three and six months ended June 30, 2014, respectively, and 82% and 71% for the three and six months ended June 30, 2013, respectively. The increase in the gross margin percentage for the three months ended June 30, 2014, from the three months ended June 30, 2013, was due to revenue from residual income that required no cost to support. The decrease in the gross margin percentage for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was due to the reduction in sales while keeping a certain level of support available during the first quarter.

Although the net changes and percent changes for our revenues and cost of revenue for the three and six months ended June 30, 2014 and 2013, are summarized above, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

Operating Expenses

General and administrative expenses were $2,413 and $19,601 for the three and six months ended June 30, 2014, respectively, compared to $26,666 and $75,959 for the three and six months ended June 30, 2013, respectively, representing a decrease of $24,253, or 91%, and $56,358, or 74%, for the three- and six-month periods, respectively. The decrease in our general and administrative expenses reflects the discontinuation of our services and general operations during 2014.

Professional fees expenses were $713 and $1,570 for the three and six months ended June 30, 2014, respectively, compared to $11,267 and $15,558 for the three and six months ended June 30, 2013, respectively, representing a decrease of $10,559, or 94%, and $13,988, or 90%, for the three- and six-month period, respectively. The decrease in our three- and six-month professional fees expenses was a result of patent legal fees accrued in 2013 but not in 2014.

Selling and marketing expenses were $0 and $0 for the three and six months ended June 30, 2014, respectively, compared to $1,176 and $5,347 for the three and six months ended June 30, 2013, respectively, representing a decrease of $1,176, or 100%, and $5,347, or 100%, for the three- and six-month periods, respectively. The decrease in our selling and marketing expenses reflects the discontinuation of our services and general operations during 2014.

Research and development expenses were $0 and $341 for the three and six months ended June 30, 2014, respectively, compared to $19,860 and $46,157 for the three and six months ended June 30, 2013, respectively, representing a decrease of $19,860, or 100%, and $45,816, or 99%, for the three- and six-month periods, respectively. The decrease in our research and development expenses reflects the discontinuation of our services and general operations during 2014.

Interest expense was $13,297 and $26,534 for the three and six months ended June 30, 2014, respectively, as compared to $12,541 and $39,454 for the three and six months ended June 30, 2013, respectively, representing an increase of $756, or 6% for the three-month period and a decrease of $12,920, or 33%, for the six-month period. The increase in our interest expense for the three-month period was immaterial. The decrease in our interest expense for the six-month period was due to fewer fees associated with credit cards that had balances forgiven with the death of our president since the credit cards were under his name.
 
18
 
 

 

Liquidity and Capital Resources

At June 30, 2014, our principal source of liquidity consisted of $220 of cash, as compared to $11,458 of cash at December 31, 2013. In addition, our stockholders’ deficit was $1,405,403 at June 30, 2014, compared to stockholders’ deficit of $1,375,974 at December 31, 2013, an increase in the deficit of $29,429.

Operations used $11,238 of net cash during the six months ended June 30, 2014, as compared to providing $645 of net cash during the six months ended June 30, 2013. The $11,883 increase in the net cash used in operations resulted primarily from 2013 services being covered by stock.

Financing activities for our operations used no net cash during the six months ended June 30, 2014, compared to using net cash of $899 during the six months ended June 30, 2013. The decrease of $899 of net cash used by financing activities was due to no loan payments being made in the six months ended June 30, 2014.

We are focusing our efforts on increasing revenue while we explore external funding alternatives as our current cash is insufficient to fund operations for the next 12 months. We expect that additional sales will enable us to increase our payments on indebtedness and support the development of other products. Although our independent auditors have expressed substantial doubt about our ability to continue as a going concern, we feel that our revenues are sufficient for our IT business solutions segment to continue as a going concern. However, in order to expand our product offerings, we expect that we will require additional investments and sales.

As we continue development of new products and identify specific commercialization opportunities, we will focus on those product markets and opportunities for which we might be able to get external funding through joint venture agreements, strategic partnerships, or other direct investments.

We have no significant contractual obligations or commercial commitments not reflected on our balance sheet as of this date.

Critical Accounting Policies

We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. The list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. The impact and any associated risks related to these policies on our business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the notes to the December 31, 2013, consolidated financial statements. Note that our preparation of the condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Revenue Recognition

Revenue from software licenses and related installation and support services is recognized when earned and realizable. Revenue is earned and realizable when persuasive evidence of an arrangement exists; services, if requested by the customers, have been rendered and are determinable; and ability to collect is reasonably assured. Amounts billed to customers before these criteria being met are deferred. Revenue from the sale of software is recognized when delivered to the customer or upon installation of the software if an installation contract exists. Revenue from post-contract telephone support service contracts is recognized as the services are provided, determined on an hourly basis.
 
19
 
 

 

Revenue applicable to multiple-element fee arrangements is divided among the software, the installation, and post-contract support service contracts using vendor-specific objective evidence of fair value, as evidenced by the prices charged when the software and the services are sold as separate products or arrangements.

Income Taxes

We account for income taxes under FASB ASC 740-10-25, Income Taxes. Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Recent Accounting Pronouncements

In June 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35, Revenue Recognition–Construction-Type and Production-Type Contracts. The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. This updated guidance is not expected to have a material impact on our results of operations, cash flows, or financial condition.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest–Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, to simplify presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance costs. For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows, or financial condition.
 
20
 
 

 

In April 2015, FASB issued ASU No. 2015-05, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If such an arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for it as a service contract. For public business entities, the ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows, or financial condition.

All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities.”


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us, in the reports that we file or submit to the SEC under the Exchange Act, is recorded, processed, summarized, and reported within the periods specified by the SEC’s rules and forms and that information is accumulated and communicated to our management, including our principal executive and principal financial officer (whom we refer to in this periodic report as our Certifying Officer), as appropriate to allow timely decisions regarding required disclosure. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management evaluated, with the participation of our Certifying Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2014, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of June 30, 2014, our disclosure controls and procedures were not effective to provide reasonable assurance as of June 30, 2014, because certain deficiencies involving internal controls constituted material weaknesses, as discussed below. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weaknesses had any effect on the accuracy of our financial statements for the current reporting period.

Limitations on Effectiveness of Controls

A system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the system will meet its objectives. The design of a control system is based, in part, upon the benefits of the control system relative to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. In addition, the design of any control system is based in part upon assumptions about the likelihood of future events.
 
21
 
 

 

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control of over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. We have assessed the effectiveness of those internal controls as of June 30, 2014, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control—Integrated Framework as a basis for our assessment.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance respecting financial statement preparation and presentation. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected.

Based on our evaluation of internal control over financial reporting, our management concluded that our internal control over financial reporting was not effective as of June 30, 2014.

As of June 30, 2014, management identified the following material weaknesses:

●   
Control Environment—We did not maintain an effective control environment for internal control over financial reporting.

●   
Segregation of Duties—As a result of limited resources and staff, we did not maintain proper segregation of incompatible duties. The effect of the lack of segregation of duties potentially affects multiple processes and procedures.

●   
Entity Level Controls—We failed to maintain certain entity-level controls as defined by the framework issued by COSO. Specifically, our lack of staff does not allow us to effectively maintain a sufficient number of adequately trained personnel necessary to anticipate and identify risks critical to financial reporting. There is a risk that a material misstatement of the financial statements could be caused, or at least not be detected in a timely manner, due to lack of adequate staff with such expertise.

●   
Access to Cash—One executive had debit cards for most of our bank accounts and the ability to transfer from our bank accounts.

These weaknesses are continuing. Management and the board of directors are aware of these weaknesses that result because of limited resources and staff. Management has begun the process of formally documenting our key processes as a starting point for improved internal control over financial reporting. Efforts to fully implement the processes we have designed have been put on hold due to limited resources, but we anticipate a renewed focus on this effort in the near future. Due to our limited financial and managerial resources, we cannot assure when we will be able to implement effective internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended June 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
22
 
 

 

PART II–OTHER INFORMATION

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As of October 25, 2011, a loan from one economic development entity was in default. The loan principal was $50,000 with accrued interest of $9,414 through June 30, 2014. We plan to work with the entity to arrange for an extension on the loan.

As of June 30, 2014, we were delinquent in payments on two loans to a second economic development entity. We owed this economic entity $63,020 in late payments, with an outstanding balance of $163,791 and accrued interest of $31,044 as of June 30, 2014. Both loans are guaranteed by two of our officers. One loan is secured by liens on intangible software assets and the other loan is secured by the officers’ personal property. We are working with this entity to bring the payments current as soon as funds are available.

As of June 30, 2014, we were delinquent in payments on a loan to a third economic development entity. We owed the second economic entity $64,070 in late payments, with an outstanding balance of $85,821 and accrued interest of $12,197 as of June 30, 2014. This loan is secured by a junior lien on all our assets and shares of founders’ common stock. We are working with this entity to bring the payments current as soon as funds are available.

During 2010 through June 2013, we borrowed an aggregate of $320,246 pursuant to convertible notes payable to related parties, which had $67,365 in accrued interest as of June 30, 2014. See Note 6–Convertible Notes Payable to Related Parties. On March 19, 2015, we exchanged the above outstanding convertible notes payable to our officers and directors in the aggregate principal amount of $320,246, plus accrued but unpaid interest of $74,134, for an aggregate of $394,380 as of December 31, 2014, into a single, $394,380 consolidated convertible note dated December 31, 2014. See Note 10–Subsequent Events. This consolidated convertible note is currently held by another person who is an officer, director, and the beneficial owner of a controlling block of our common stock, with an outstanding balance of principal and accrued interest of $11,734, as of June 30, 2015.


ITEM 6. EXHIBITS

The following exhibits are filed as a part of this report:

Exhibit Number*
 
Title of Document
 
Location
         
Item 31
 
Rule 13a-14(a)/15d-14(a) Certifications
   
31.01
 
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14
 
Attached
         
Item 32
 
Section 1350 Certifications
   
32.01
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer)
 
Attached
         
Item 101
 
Interactive Data
   
101
 
Interactive Data files
 
Attached
_______________
*
All exhibits are numbered with the number preceding the decimal indicating the applicable SEC reference number in Item 601 and the number following the decimal indicating the sequence of the particular document.

23
 
 

 


SIGNATURE

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

 
TETRIDYN SOLUTIONS, INC.
 
       
       
       
Date: August 31, 2015
By:
/s/ Jeremy P. Feakins
 
   
Jeremy P. Feakins
 
   
Chief Executive Officer and
 
   
Chief Financial Officer
 

24