UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the transition period from                  to

 

COMMISSION FILE NUMBER 333-151633

 

MAGNOLIA SOLAR CORPORATION

(Exact Name of small business issuer as specified in its charter)

 

Nevada		39-2075693
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

54 Cummings Park, Suite 316, Woburn, MA 01801

(Address of principal executive offices) (Zip Code)

 

Issuer’s telephone Number: (781) 497-2900

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ☒     No ☐

 

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

 

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐		Accelerated filer  ☐
Non-accelerated filer ☐		Smaller reporting company  ☒
(Do not check if a smaller reporting company)

 

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

 

As of November 9, 2015, the issuer had 47,434,231 shares of common stock outstanding.

 

 

 

TABLE OF CONTENTS

 

		Page
	PART I
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
	PART II
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MAGNOLIA SOLAR CORPORATION

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Table of Contents

  

Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014	4
Condensed Consolidated Statements of Operations (Unaudited) for the nine months ended September 30, 2015 and 2014	5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2015 and 2014	7
Notes to Condensed Consolidated Financial Statements (Unaudited)	8

 

 

MAGNOLIA SOLAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS 

SEPTEMBER 30, 2015 (UNAUDITED) AND DECEMBER 31, 2014

  

		SEPTEMBER 30,				DECEMBER 31,
		2015				2014
ASSETS
CURRENT ASSETS
Cash		$	75,444			$	25,127
Accounts receivable			1,979				185,455
Prepaid expense			1,417				1,417
Total current assets			78,840				211,999
Fixed assets, net			389				623
OTHER ASSETS
License with related party, net of accumulated amortization			92,095				118,833
Total other assets			92,095				118,833
TOTAL ASSETS		$	171,324			$	331,455
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	639,762			$	578,810
Current portion of Original Issue Discount Senior Secured Convertible
Promissory Note, net of discount			2,400,000				2,400,000
Total current liabilities			3,039,762				2,978,810
TOTAL LIABILITIES			3,039,762				2,978,810
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value, 75,000,000 shares authorized, 44,100,898 and 39,727,316 shares issued and outstanding			44,101				39,727
Additional paid-in capital			2,427,351				2,228,367
Additional paid-in capital - warrants			962,297				962,297
Accumulated deficit			(6,302,187	)			(5,877,746	)
Total stockholders' deficit			(2,868,438	)			(2,647,355	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	171,324			$	331,455

  

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

 

 

MAGNOLIA SOLAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

		NINE MONTHS ENDED SEPTEMBER 30, 2015				NINE MONTHS ENDED SEPTEMBER 30, 2014
REVENUE - net		$	150,571			$	150,256
COST OF REVENUES			102,069				92,034
GROSS PROFIT			48,502				58,222
OPERATING EXPENSES
Indirect and administrative labor			122,417				152,605
Professional fees			116,382				96,302
Depreciation and amortization expense			26,972				26,972
General and administrative			27,182				34,513
Total operating expenses			292,953				310,392
OTHER (INCOME) EXPENSE
Interest expense			179,990				179,982
Total other (income) expense			179,990				179,982
LOSS BEFORE PROVISION FOR INCOME TAXES			(424,441	)			(432,152	)
PROVISION FOR INCOME TAXES			-				-
NET LOSS		$	(424,441	)		$	(432,152	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING			41,812,486				36,709,244
NET LOSS PER SHARE		$	(0.01	)		$	(0.01	)

 

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

 

 

MAGNOLIA SOLAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

		THREE MONTHS ENDED SEPTEMBER 30, 2015				THREE MONTHS ENDED SEPTEMBER 30, 2014
REVENUE - net		$	-			$	68,578
COST OF REVENUES			-				44,712
GROSS PROFIT			-				23,866
OPERATING EXPENSES
Indirect and administrative labor			32,545				44,772
Professional fees			51,896				32,912
Depreciation and amortization expense			8,990				8,991
General and administrative			8,758				11,769
Total operating expenses			102,189				98,444
NON-OPERATING EXPENSES
Interest expense including amortization of OID and debt discount, net			59,994				59,999
Total non-operating expenses			59,994				59,999
LOSS BEFORE PROVISION FOR INCOME TAXES			(162,183	)			(134,577	)
PROVISION OF INCOME TAXES			-				-
NET LOSS		$	(162,183	)		$	(134,577	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING			43,564,864				38,527,316
NET LOSS PER SHARE		$	(0.00	)		$	(0.00	)

 

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

 

  

MAGNOLIA SOLAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

		NINE MONTHS ENDED SEPTEMBER 30, 2015				NINE MONTHS ENDED SEPTEMBER 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(424,441	)		$	(432,152	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense			26,972				26,972
Stock based compensation			23,358				19,898
Common stock issued fir services rendered			-				9,000
Common stock issued for payment of interest			180,000				180,000
Change in assets and liabilities:
Decrease in accounts receivable			183,476				16,075
Increase in accounts payable and accrued expenses			60,952				96,052
Total adjustments			474,758				347,997
Net cash provided by (used in) operating activities			50,317				(84,155	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			50,317				(84,155	)
CASH - BEGINNING OF PERIOD			25,127				118,172
CASH - END OF PERIOD		$	75,444			$	34,017
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	-			$	-
Income taxes		$	912			$	1,222
NON-CASH SUPPLEMENTAL INFORMATION:
Stock issued for services rendered		$	-			$	9,000
Stock issued for payment of interest		$	180,000			$	180,000
Stock based compensation		$	23,358			$	19,898

 

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

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 1 – Organization and Nature of Business

 

The unaudited financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements and notes are presented as permitted on Form 10-Q and do not contain certain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the December 31, 2014 Form 10-K filed with the SEC, including the audited financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

 

These unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.

 

Magnolia Solar Corporation (the “Registrant”) through its wholly-owned subsidiary, Magnolia Solar, Inc. (“Magnolia Solar” and together with the Registrant, “we,” “our,” “us,” or the “Company”) is focused on developing and commercializing thin film solar cell technologies that employ nanostructured materials and designs.

 

The Company is pioneering the development of thin film, high efficiency solar cells for applications such as power generation for electrical grids as well as for local applications, including lighting, heating, traffic control, irrigation, water distillation, and other residential, agricultural and commercial uses.

 

The Company’s technology takes multiple approaches to bringing cell efficiencies close to those realized in silicon based solar cells while also lowering manufacturing costs. The technology uses a different composition of materials than those used by competing thin film cell manufacturers; incorporates additional layers of material to absorb a wider spectrum of light; uses inexpensive substrate materials, such as glass and polymers, lowering the cost of the completed cell compared to silicon based solar cells; and is based on non-toxic materials that do not have adverse environmental effects.

 

Since 2010, the Company filed a series of U.S. utility patents relating to the technologies under development.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 1 – Organization and Nature of Business (continued)

 

Reverse Merger

On November 19, 2007, the Registrant, formerly known as Mobilis Relocation Services, Inc. (“Mobilis”), was organized under the laws of the State of Nevada. Mobilis formed Magnolia Solar Acquisition Corp., a wholly-owned subsidiary incorporated in the State of Delaware. Mobilis filed a Certificate of Change to its Articles of Incorporation in order to affect a forward split of the number of authorized shares of common stock which they were authorized to issue, and of the then issued and outstanding shares in a ratio of 1.3157895:1. The forward split occurred in February 2010. All share and per share amounts have been reflected herein post-split.

 

On December 31, 2009, Mobilis entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) with Magnolia Solar, Inc., a privately held Delaware corporation incorporated on January 8, 2008, and Magnolia Solar Acquisition Corp. (“Acquisition Sub”). Upon closing of the transaction, under the Merger Agreement, Acquisition Sub merged with and into Magnolia Solar, and Magnolia Solar, as the surviving corporation, became a wholly-owned subsidiary of Mobilis. Thereafter, Mobilis changed its name to Magnolia Solar Corporation. The transaction was accounted for as a reverse merger, and the historical financial information is that of Magnolia Solar, Inc.

 

Going Concern

These condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has been generating revenues from various development contracts with governmental agencies, however the Company has generated losses totaling $424,441 and $432,152 for the nine months ended September 30, 2015 and 2014, respectively. While the Company raised funds in a private placement that it consummated in 2009 (raising $990,000 in $2,660,000 of Original Issue Discount Senior Secured Convertible Promissory Notes (the “2009 Notes”)), at September 30, 2015 and December 31, 2014, it had cash of $75,444 and $25,127, respectively, and will need to raise additional funds to carry out its business plan.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 1 – Organization and Nature of Business (continued)

 

Going Concern (continued)

The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations.

 

On December 29, 2011, the 2009 Notes in the aggregate principal amount of $2,660,000 were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $260,000 converted into an aggregate of 1,040,000 shares of common stock of the Company at an adjusted conversion price of $0.25 per share, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2011 to December 31, 2012 and 2009 Notes in the aggregate principal amount of the remaining $400,000 were amended to extend the maturity date from December 31, 2011 to December 31, 2013, (iii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to adjust the conversion price of such notes from $1.00 per share to $0.25 per share, (iv) 2009 Notes in the aggregate principal amount of $400,000 were amended to provide that such notes shall, from January 1, 2012 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, (v) an aggregate of 1,300,000 shares of common stock of the Company were issued to certain holders of the 2009 Notes, and (vi) the exercise price of the warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $1.25 per share to $0.50 per share.

 

On December 21, 2012 and June 27, 2013 the 2009 Notes as described in the preceding paragraph were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2012 to December 31, 2013, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to provide that such notes shall, from January 1, 2013 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, and (iii) the exercise price of warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $0.50 per share to $0.25 per share.

 

On December 29 and 31, 2013, the 2009 Notes as described in the preceding paragraphs were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,400,000 were amended to extend the maturity dates from December 31, 2013 to December 31, 2014, and (ii) the exercise price of the warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $0.25 per share to $0.10 per share. Additionally, the Company also agreed to extend the expiration date of the warrants to purchase an aggregate of 2,660,000 shares of common stock from December 31, 2014 to December 31, 2016.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Note 1 – Organization and Nature of Business (continued)

 

Going Concern (continued)

As the 2009 Notes matured on December 31, 2014, they are past due. Such indebtedness is secured by substantially all of the Company’s assets. The Company is attempting to negotiate with such holders of the 2009 Notes an extension of the maturity date or an agreement to convert the debt into equity. There can be no assurances that the Company will be successful in reaching satisfactory agreements with such holders of the 2009 Notes or that it will reach agreement at all. Furthermore, the Company’s ultimate success depends upon the Company’s ability to raise additional capital. If a default is called on the 2009 Notes, then holders of the 2009 Notes may foreclose on the debt and seize the Company’s assets which may force the Company to suspend or cease operations altogether.

 

There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to the Company. If the Company were to default on its indebtedness, then holders of the notes may foreclose on the debt and seize the Company's assets which may force the Company to suspend or cease operations altogether. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These factors raise substantial doubt regarding the ability of the Company to continue as a going concern.

 

The Company may need to raise additional capital to expand operations to the point at which the Company can achieve profitability. The terms of equity or debt that may be raised may not be on terms acceptable by the Company. If adequate funds cannot be raised outside of the Company, the Company may suspend or cease operations altogether.

 

The development of renewable energy and energy efficiency marks a new era of energy exploration in the United States. The Company continues to explore low cost alternatives for energy solutions which are in line with United States government initiatives for renewable energy sources. The Company hopes that these factors will mitigate the current unstable factors in the United States economy.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Note 2 - Summary of Significant Accounting Policies

 

Basis of Accounting

The financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles.

 

Principles of Consolidation

The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.

 

The consolidated financial statements include all accounts of the entities at September 30, 2015 as follows:

 

	Name of consolidated subsidiary or entity		State or other jurisdiction of incorporation or organization		Date of incorporation or formation (date of acquisition, if applicable)		Attributable interest at September 30, 2015 and December 31, 2014
	Magnolia Solar Inc.		Delaware, U.S.A.		January 8, 2008			100%

  

All inter-company balances and transactions have been eliminated.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Note 2 - Summary of Significant Accounting Policies (continued)

 

Use of Estimates

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

 

Accounts Receivable

For financial reporting, current earnings are charged and an allowance is credited with a provision for doubtful accounts based on experience. Accounts deemed uncollectible are charged against this allowance. Receivables are reported on the balance sheet net of such allowance. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. The Company believes no allowance for doubtful accounts is necessary at September 30, 2015 or December 31, 2014.

 

Property and Equipment

Property and equipment are stated at cost and are depreciated on a straight-line basis over their estimated useful lives (from three to seven years). Additions, renewals, and betterments, unless of a minor amount, are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

 

Impairment of Long-Lived Assets

The Company reviews their recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment will be based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell. The Company’s management has determined that the fair value of long-lived assets exceeds the book value and thus no impairment charge is necessary as of September 30, 2015 or December 31, 2014.

 

Fair Value of Financial Instruments

In accordance with ASC 820, Fair Value Measurements and Disclosures, the carrying amount reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company does not utilize derivative instruments.

 

  

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 2 - Summary of Significant Accounting Policies (continued)

 

Income Taxes

The Company accounts for income taxes utilizing the liability method of accounting. Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.

 

Revenue Recognition

Revenue is recognized from private and public sector contracts that are time and material type contracts. These revenues are recognized in accordance with ASC 605, Revenue Recognition. The Company recognizes revenue when; (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable and (4) collectability is reasonably assured.

 

The Company assesses whether fees are fixed or determinable at the time of sale and recognizes revenue if all other revenue recognition requirements are met. The Company's standard payment terms are net 30 days. Payments that extend beyond 30 days from the contract date but that are due within twelve months are generally deemed to be fixed or determinable based on the Company's successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition.

 

Revenue from inception to September 30, 2015 has been primarily from research and development grants or contracts to develop solar cells using the Company’s technology.

 

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. The Company had no cash equivalents as of September 30, 2015 or December 31, 2014.

 

Uncertainty in Income Taxes

The Company follows ASC 740-10, Accounting for Uncertainty in Income Taxes. This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates their tax positions on an annual basis. The Company’s policy is to recognize both interest and penalties related to unrecognized tax benefits expected to result in payment of cash within one year are classified as accrued liabilities, while those expected beyond one year are classified as other liabilities. The Company has not recorded any interest or penalties since its inception.

 

The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. The tax years for 2012 to 2014 remain open for examination by federal and/or state tax jurisdictions. The Company is currently not under examination by any other tax jurisdictions for any tax year.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 2 - Summary of Significant Accounting Policies (continued)

 

Loss Per Share of Common Stock

Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented. The following is a reconciliation of the computation for basic and diluted EPS:

 

			September 30,				September 30,
			2015				2014
	Net loss		($	424,440	)		($	432,152	)
	Weighted-average common shares outstanding (Basic)			41,812,486				36,709,244
	Weighted-average common stock
	Equivalents
	Stock options			2,450,000				1,112,821
	Warrants			3,785,300				3,785,300
	Weighted-average common shares outstanding (Diluted)			48,047,786				41,607,365

 

Stock based compensation

The Company applies ASC No. 718 and ASC Subtopic No. 505-50, Equity-Based Payments to Non Employees, to options and other stock based awards issued to nonemployees. In accordance with ASC No. 718 and ASC Subtopic No. 505-50, the Company uses the Black-Scholes option pricing model to measure the fair value of the options at the measurement date.

 

Recently Issued Accounting Standards

During August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” The provisions of ASU No. 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.

 

  

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Note 2 - Summary of Significant Accounting Policies (continued)

 

Recently Issued Accounting Standards (continued)

During June 2014, the FASB issued an Accounting Standards Update No. 2014-10, "Development Stage Entities (Topic 915) - Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation ("ASU 2014-10")". The objective of ASU 2014-10 is to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements for development stage entities. ASU 2014-10 is effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. The Company has elected early implementation, as permitted by the standard, for the year ended December 31, 2014. All development stage language disclosures and amounts have been removed as a result of the adoption of ASU 2014-10.

 

During May 2014, the FASB issued an Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". The objective of ASU 2014-09 is to (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more robust framework for addressing revenue issues, (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more useful information to users of financial statements through improved disclosure requirements, and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the effect of this standard on its financial statements.

 

There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Note 3 - Stockholders’ Deficit

 

The Company has 75,000,000 shares of common stock, par value of $0.001 per share authorized.

 

Shares

Prior to the Reverse Merger as discussed in Note 1, the Company issued 4,473,686 shares of common stock between January and March 2008 at prices ranging from $0.01 to $0.02 per share for a total of $53,000 cash.

 

In accordance with the Reverse Merger, the Company cancelled 1,973,684 shares of common stock and issued 21,330,000 shares to the former shareholders of Magnolia Solar, Inc. As a result of these transactions, as of December 31, 2009, there were 23,830,000 shares of common stock issued and outstanding.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Note 3 - Stockholders’ Deficit (continued)

 

Shares (continued)

The Company effectuated a 1.3157895:1 forward stock split in February 2010, in accordance with the Merger Agreement which resulted in 23,830,000 shares of common stock issued and outstanding.

 

In February 2014, the Company issued 1,048,950 shares of common stock at its fair value price ($0.06 per share) in lieu of interest payment for a value of $60,000.

 

In March 2014, the Company issued 94,737 shares of common stock for consulting services for a value of $4,500 at a fair market value price of $0.05 per share.

 

In April 2014, the Company issued 2,068,965 shares of common stock at its fair value price ($0.03 per share) in lieu of interest payment for a value of $60,000.

 

In April 2014, the Company issued 160,714 shares of common stock for consulting services for a value of $4,500 at a fair market value price of $0.03 per share.

 

In August 2014, the Company issued 1,318,682 shares of common stock at its fair value price ($0.05 per share) in lieu of interest payment for a value of $60,000.

 

In October 2014, the Company issued 1,200,000 shares of common stock at its fair value price ($0.05 per share) in lieu of interest payment for a value of $60,000.

 

In March 2015, the Company issued 1,195,219 shares of common stock at its fair value price ($0.05 per share) in lieu of interest payment for a value of $60,000.

 

In April 2015, the Company issued 1,534,526 shares of common stock at its fair value price ($0.04 per share) in lieu of interest payment for a value of $60,000.

 

In July 2015, the Company issued 1,643,837 shares of common stock at its fair value price ($0.04 per share) in lieu of interest payment for a value of $60,000.

 

As of September 30, 2015, the Company had 44,100,898 shares issued and outstanding.

 

Warrants

Following the closing of the Reverse Merger in December 2009, the Company issued five-year callable warrants (the “2009 Warrants”) to purchase an aggregate of 2,660,000 shares of common stock exercisable at $1.25 per share to investors in a private placement (the “2009 Private Placement”) and further issued seven year placement agent warrants to purchase an aggregate of 725,300 shares of common stock exercisable at $1.05 per share. On December 29, 2011, the exercise price of both the 2009 Warrants and placement agent warrants was reduced to $0.50 per share.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 3 - Stockholders’ Deficit (continued)

 

Warrants (continued)

On December 21, 2012, the exercise price of the 2009 Warrants and placement agent warrants were reduced to $0.25 per share. On December 23, 2013, the exercise price of the 2009 Warrants and placement agent warrants were further reduced to $0.10 per share. Additionally, the Company also agreed to extend the expiration date of the 2009 Warrants from December 31, 2014 to December 31, 2016.

 

On August 15, 2011, the Company issued 400,000 warrants for public relations services. The warrants vest immediately, and are for a term of 5 years with a strike price of $0.50 per share. The warrants have been valued at $59,534 and are reflected in the consolidated financial statements for the year ended December 31, 2014.

 

As of September 30, 2015, the following warrants are outstanding:

 

	Balance – December 31, 2008			-				-
	Issued – in the 26.6 units			2,660,000			$	0.10
	Issued – to Placement Agent			725,300			$	0.10
	Balance – December 31, 2009			3,385,300			$	0.10
	Balance – December 31, 2010			3,385,300			$	0.10
	Issued – for public relations			400,000			$	0.50
	Balance – December 31, 2011			3,785,300			$	0.14
	Balance – December 31, 2012			3,785,300			$	0.14
	Balance – December 31, 2013			3,785,300			$	0.14
	Balance – December 31, 2014			3,785,300			$	0.14
	Balance – September 30, 2015			3,785,300			$	0.14

 

Stock Options

In May 2014, the Company granted 2,450,000 shares of common stock under the 2013 Incentive Stock Option Plan. Under the 2013 Plan, the Company may grant options to purchase up to 5,500,000 shares of common stock to be granted to Company employees, officers, directors, consultants and advisors. The vesting provisions, exercise price and expiration dates will be established by the Board of Directors (the "Board") of the Company at the date of grant, but incentive stock options may be subject to earlier termination, as provided in the 2013 Plan. As of September 30, 2015, there were 2,335,709 shares available for future grant.

 

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Note 3 - Stockholders’ Deficit (continued)

 

Stock Options (continued)

Expected volatility was calculated based upon the company’s observed median volatility. The risk-free interest rate assumption is based upon the United States Treasury Bond yield curve in effect at the time of grant for instruments with a similar expected life.

 

The Company recognized compensation cost related to stock-based compensation in the amount of $23,358, for the nine months ended September 30, 2015. The Company has not recognized any tax benefits or deductions related to the effects of employee stock-based compensation.

 

In addition, as of September 30, 2015, approximately $18,168 was related to non-vested options which will be recognized over a weighted-average period of approximately 3.67 years.

 

No options were exercised under all share-based compensation arrangements for the period ending September 30, 2015.

 

The following is a summary of stock option activity under the Company's stock option plan:

 

			Number of Options/Shares				Range of Exercise Prices				Weighted-Average Exercise Price
	Outstanding as of December 31, 2014			2,450,000			$	0.05			$	0.05
	Options granted			–			$	0.00			$	0.00
	Options exercised			–			$	0.00			$	0.00
	Options forfeited/expired/cancelled			–			$	0.00			$	0.00
	Outstanding as of September 30, 2015			2,450,000			$	0.05			$	0.05
	Exercisable as of September 30, 2015			1,806,875			$	0.05			$	0.05
	Exercisable as of December 31, 2014			980,000			$	0.05			$	0.05

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Note 3 - Stockholders’ Deficit (continued)

 

Stock Options (continued)

Information about stock options outstanding as of September 30, 2015 is as follows:

 

	Exercise Price				Number of Options Outstanding				Weighted-Average Remaining Contractual Life (years)				Number of Options Exercisable
	$	0.05				2,450,000				3.67				1,806,875
						2,450,000				3.67				1,806,875

 

Note 4 - Property and Equipment

 

Property and equipment consisted of the following at September 30, 2015 and December 31, 2014:

 

			September 30,				December 31,
			2015				2014
	Office equipment and computers		$	6,106			$	6,106
	Furniture and fixtures			2,182				2,182
				8,288				8,288
	Accumulated depreciation			(7,899	)			(7,665	)
			$	389			$	623

  

The Company incurred $234 and $234, respectively, in depreciation expense for the periods ended September 30, 2015 and 2014.

  

Note 5 - License Agreement with Related Party

 

The Company has entered into a 10-year, renewable, exclusive license with Magnolia Optical Technologies, Inc. (“Magnolia Optical”) on April 30, 2008 for the exclusive rights of the technology related to the application of Optical’s solar cell technology. Magnolia Optical shares common ownership with the Company.

 

The Company is amortizing the license fee of $356,500 over the 120 month term of the Agreement. Accumulated amortization as of September 30, 2015 and December 31, 2014 was $264,405 and $237,667, respectively. Amortization expense for each of the nine months ended September 30, 2015 and 2014 was $26,738, respectively. The Company’s management has determined that the fair value of the license exceeds the book value and thus no further impairment or amortization is necessary as of September 30, 2015 or December 31, 2014.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 6 – Original Issue Discount Senior Secured Convertible Promissory Note

 

Original Notes

Following the closing of the Reverse Merger in December 2009, the Company issued 26.6 units in the 2009 Private Placement consisting of an aggregate of $2,660,000 of 2009 Notes and 2009 Warrants exercisable into an aggregate of 2,660,000 shares of common stock exercisable at $1.25 per share, for $50,000 per unit for aggregate proceeds to the Company of $990,000. In addition, placement agent warrants to purchase an aggregate of 725,300 shares of common stock exercisable at $1.05 per share were issued. The 2009 Notes are secured by a first-priority security interest in the assets of the Company. Holders of the 2009 Notes and warrants issued in the 2009 Private Placement also have the right to “piggyback” registration of the shares underlying the 2009 Notes and warrants.

 

Prior to the amendment and restatement of the 2009 Notes, the 2009 Notes were originally due December 31, 2011 and convertible at the option of the holder, into shares of the Company’s common stock at an initial conversion rate of $1.00 per share.

 

Amended Notes

On December 29, 2011, the Company entered into amendment agreements with holders of the 2009 Notes and 2009 Warrants. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $260,000 were converted into an aggregate of 1,040,000 shares of common stock of the Company at an adjusted conversion price of $0.25 per share, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2011 to December 31, 2012 and 2009 Notes in the aggregate principal amount of the remaining $400,000 were amended to extend the maturity date from December 31, 2011 to December 31, 2013, (iii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to adjust the conversion price of such notes from $1.00 per share to $0.25 per share, (iv) 2009 Notes in the aggregate principal amount of $400,000 were amended to provide that such notes shall, from January 1, 2012 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, (v) an aggregate of 1,300,000 shares of common stock of the Company were issued to certain holders of the 2009 Notes, and (vi) the exercise price of warrants to purchase an aggregate of 3,385,000 shares of common stock was adjusted from $1.25 per share to $0.50 per share.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 6 – Original Issue Discount Senior Secured Convertible Promissory Note (continued)

 

Amended Notes (continued)

On December 21, 2012 and on June 27, 2013 the 2009 Notes as described in the preceding paragraph were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2012 to December 31, 2013, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to provide that such notes shall, from January 1, 2013 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, and (iii) the exercise price of the warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $0.50 per share to $0.25 per share. Upon amendment of the notes, interest was calculated on the entire $2,400,000 of promissory notes at a rate of 10% per year. Interest expense was accrued in the amount of $60,000 per quarter and shares are issued in lieu of cash payments.

 

On December 29 and 31, 2013 the 2009 Notes as described in the preceding paragraph were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,400,000 were amended to extend the maturity dates from December 31, 2013 to December 31, 2014, (ii) the exercise price of the warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $0.25 per share to $0.10 per share. Additionally, the Company also agreed to extend the expiration date of the warrants to purchase an aggregate of 2,660,000 shares of common stock from December 31, 2014 to December 31, 2016.

 

As of September 30, 2015, the Company issued 15,461,607 shares of its common stock in lieu of interest payments in the aggregate of $640,000 relating to the 2009 Notes in the aggregate principal of $2,400,000.

 

As of September 30, 2015, the entire $2,400,000 balance of the amended 2009 Notes remains outstanding. In the transaction, the Company recognized a discount of $1,670,000 which was amortized over the original life of the 2009 Notes. The discount represented the original issue discount. In addition, the Company determined that the value of the warrants in the transaction of $412,830 as a discount to the 2009 Notes. This discount was being amortized as well over the original life of the 2009 Notes.

 

As the 2009 Notes matured on December 31, 2014 and are past due. Such indebtedness is secured by substantially all of the Company’s assets. The Company is attempting to negotiate with such holders of the 2009 Notes an extension of the maturity date or an agreement to convert the debt into equity. There can be no assurances that the Company will be successful in reaching satisfactory agreements with such holders of the 2009 Notes or that it will reach agreement at all. Furthermore, the Company’s ultimate success depends upon the Company’s ability to raise additional capital. If a default is called on the 2009 Notes, then holders of the 2009 Notes may foreclose on the debt and seize the Company’s assets which may force the Company to suspend or cease operations altogether.

  

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 6 – Original Issue Discount Senior Secured Convertible Promissory Note (continued)

 

Amended Notes (continued)

As of September 30, 2015, $2,400,000 of the 2009 Notes are classified as a current liability and the amounts have not been repaid as of the issuance of these financial statements. If the 2009 Notes are not extended, the Noteholders could foreclose on the note. The modifications made to the debt instruments did not constitute a material modification under ASC 470-50.

 

Note 7 – Provision for Income Taxes

 

Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.

 

As of September 30, 2015, there is no provision for income taxes, current or deferred.

 

			September 30, 2015
	Net operating losses		$	1,326,000
	Valuation allowance			(1,326,000	)
			$	-

 

At September 30, 2015, the Company had a net operating loss carry forward in the amount of approximately $3,900,000 available to offset future taxable income through 2035. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

 

A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the years ended September 30, 2015 and 2014 is summarized below.

 

	Federal statutory rate			(34.00	)%
	State income taxes, net of federal			0.0
	Valuation allowance			34.0
				0.0	%

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 8 – Commitments and Contingencies

 

Office Lease

 

The Company leases office space at two locations that expire between January 31, 2016 and December 31, 2015. Rent expense for the Company’s facilities for the nine months ended September 30, 2015 and September 30, 2014 totaled $12,750 and $13,615, respectively.

 

The future minimum lease payments due under the above mentioned non-cancelable lease agreements are as follows:

 

	Year ending December 31,
	2015		$	4,629
	2016			1,202
			$	5,831

  

Contract Related Fees

 

As part of the contract to develop its products, the Company has agreed to pay the contractor 1.5% of future New York state manufactured sales, and 5% of future non-New York state manufactured sales until the entire funds paid by the contractor have been repaid, or 15 years, whichever comes first. As of September 30, 2015, the Company has $1,251,885 of contract related expenses, all of which will be owed to the contractor, contingent upon the sale of the Company’s product. No liability is accrued since no sales have occurred.

 

Note 9 - Concentration of Credit Risk

 

The Company maintains its cash in one bank deposit account, which at times may exceed the federally insured limits of $250,000 that exist through September 30, 2015. At September 30, 2015, the Company did not have any uninsured deposits.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

 

Note 9 - Concentration of Credit Risk (continued)

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company extends credit based on the customers’ financial conditions. The Company does not require collateral or other security to support customer receivables. Credit losses, when realized, have been within the range of management’s expectations. To further reduce credit risk associated with accounts receivable, the Company performs periodic credit evaluations of its customers.

 

			September 30,				September 30,
	Concentrations in accounts receivable:		2015				2014
	Customer A			98	%			62	%
	Customer B			*				37	%

 

			September 30,				September 30,
	Concentrations in net revenue:		2015				2014
	Customer A			99	%			85	%

  

Note 10 - Fair Value Measurements

 

The Company adopted certain provisions of ASC Topic 820. ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:

 

	Level 1	Quoted prices in active markets for identical assets or liabilities.  The Company's Level 1 assets consist of cash and cash equivalents.
	Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Note 10 - Fair Value Measurements (continued)

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

 

	September 30, 2015
			Level 1				Level 2				Level 3				Total
	Cash		$	75,444			$	-			$	-			$	75,444
	Total assets		$	75,444			$	-			$	-			$	75,444
	Original Issue Discount Senior Secured Convertible Promissory Notes		$	-			$	-			$	2,400,000			$	2,400,000
	Total liabilities		$	-			$	-			$	2,400,000			$	2,400,000

 

	December 31, 2014
			Level 1				Level 2				Level 3				Total
	Cash		$	25,127			$	-			$	-			$	25,127
	Total assets		$	25,127			$	-			$	-			$	25,127
	Original Issue Discount Senior Secured Convertible Promissory Notes		$	-			$	-			$	2,400,000			$	2,400,000
	Total liabilities		$	-			$	-			$	2,400,000			$	2,400,000

  

 

MAGNOLIA SOLAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2015

  

Note 10 - Fair Value Measurements (continued)

 

			Original Issue Discount Senior Secured Convertible Promissory Notes
	Balance, January 1, 2014		$	2,400,000
	Realized gains (losses)			-
	Unrealized gains (losses) relating to instruments still held at the reporting date			-
	Purchases, sales, issuances and settlements, net			-
	Discount on notes			-
	Amortization of discount on notes			-
	Conversion of notes to common stock			-
	Balance, December 31, 2014		$	2,400,000
	Realized gains (losses)			-
	Unrealized gains (losses) relating to instruments still held at the reporting date			-
	Purchases, sales, issuances and settlements, net			-
	Discount on notes			-
	Amortization of discount on notes			-
	Balance, September 30, 2015		$	2,400,000

 

Note 11 – Subsequent Events

 

On October 27, 2015, the Company issued 3,333,333 shares of common stock for payment of interest in lieu of cash.

 

On October 28, 2015, the Company entered into a non-binding Memorandum of Understanding with EcoArk, Inc. (“EcoArk”) providing, among other things, for the acquisition of EcoArk by the Company in a share for share exchange pursuant to which it is contemplated that at the closing EcoArk shareholders will own approximately 95% of the outstanding shares of the Company.

 

On November 5, 2015, the Company signed an amendment to terminate lease on its facility in Albany, NY effective October 31, 2015.

 

 

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

 

Forward-Looking Statements

 

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

 

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

Overview

 

We are a development stage company focused on developing and commercializing thin film solar cell technologies that employ nanostructured materials and designs. We are pioneering the development of thin film, high efficiency solar cells for applications such as power generation for electrical grids as well as for local applications, including lighting, heating, traffic control, irrigation, water distillation, and other residential, agricultural and commercial uses.

 

We intend to become a highly competitive, low cost provider of terrestrial photovoltaic cells for both civilian and military applications. These cells will be based on low cost substrates such as glass and flexible substrates such as stainless steel. Our primary goal is to introduce a product which offers significant cost savings per watt over traditional silicon based solar cells. To date, we have not generated material revenues or earnings as a result of our activities.

 

Results of Operations

 

Our revenues are derived from research and development grants and contracts awarded to the Company by government and private sector.

 

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

 

Revenues

 

Currently we are in our development stage and have recorded no revenue for the three months ended September 30, 2015 compared to $68,578 of revenue for the three months ended September 30, 2014, a decrease of $68,578 or 100.00%. We anticipate emerging from the development stage in fiscal 2016. The revenue recorded is from research and development grants or contracts to develop solar cells using Magnolia’s technology.

 

Cost of Revenues

 

Cost of revenues for the three months ended September 30, 2015 were $0 as compared to $44,712 for the three months ended September 30, 2014, representing a decrease of $44,712, or 100.00%. Cost of revenues were comprised of direct labor, direct travel, materials, and subcontracts for the solar cell development. The decrease in cost of revenues for this period was as a result of the Company generating no revenue.

 

Operating Expenses

 

Indirect and Administrative Labor

 

Indirect and administrative labor expense for the three months ended September 30, 2015 was $32,545 as compared to $44,772 for the three months ended September 30, 2014, a decrease of $12,227 or 27.31%. Indirect labor and benefits were comprised of wages for the administrative staff, payroll taxes, health insurance, disability insurance, indirect travel, other administrative expenses, provision for vacation time, and stock compensation expense. The decrease in indirect and administrative expenses for this period was primarily attributable to a decrease in indirect labor and travel costs.

 

 

Professional Fees

 

Professional fees for the three months ended September 30, 2015 were $51,896 as compared to $32,912 for the three months ended September 30, 2014, representing an increase of $18,984, or 57.68%. Professional fees were comprised of accounting, business services, public relations, audit, and legal fees. The increase in professional fees for this period was attributable primarily to an increase in general legal counsel costs incurred.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense for the three months ended September 30, 2015 were $8,991 as compared to $8,991 for the three months ended September 30, 2014, representing no increase or decrease. Depreciation and amortization expense was comprised of amortization of the license fee paid for the technology license, amortization of the debt issue, and depreciation on the property and equipment.

 

General and Administrative

 

General and administrative expense for the three months ended September 30, 2015 was $8,758 as compared to $11,769 for the three months ended September 30, 2014, a decrease of $3,011 or 25.58%. General and administrative expense was comprised of expenses for office lease, computer, office supplies, dues and subscriptions, worker’s compensation, disability insurance, printing, telephone, business meals, repairs and maintenance, public relations, advertising, state taxes, business gifts and other miscellaneous items. The decrease in general and administrative expense for this period was attributable to general cost cuts.

 

Interest Expense

 

Interest expense for the three months ended September 30, 2015 was $59,994 as compared to $59,999 for the three months ended September 30, 2014. Interest expense was comprised of interest incurred on outstanding long-term debt.

 

Net Loss

 

Our net loss for the three months ended September 30, 2015 was $162,183, as compared to $134,577 for the three months ended September 30, 2014, representing a decrease of $27,606, or 20.51%.

 

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

 

Revenues

 

Currently we are in our development stage and have recorded $150,571 of revenue for the nine months ended September 30, 2015 compared to $150,256 of revenue for the nine months ended September 30, 2014, an increase of $315 or 0.21%. We anticipate emerging from the development stage in fiscal 2016. The revenue recorded is from research and development grants or contracts to develop solar cells using Magnolia’s technology.

 

Cost of Revenues

 

Cost of revenues for the nine months ended September 30, 2015 were $102,069 as compared to $92,034 for the nine months ended September 30, 2014, representing an increase of $10,035, or 10.90%. Cost of revenues were comprised of direct labor, direct travel, materials, and subcontracts for the solar cell development. The increase in cost of revenues for this period was attributable to an increase in subcontractor costs due to work on some additional contracts.

 

Operating Expenses

 

Indirect and Administrative Labor

 

Indirect and administrative labor expense for the nine months ended September 30, 2015 was $122,417 as compared to $152,605 for the nine months ended September 30, 2014, a decrease of $30,188 or 19.78%. Indirect labor and benefits were comprised of wages for the administrative staff, payroll taxes, health insurance, disability insurance, indirect travel, other administrative expenses, provision for vacation time, and stock compensation expense. The decrease in indirect and administrative expenses for this period was primarily attributable to a decrease in indirect labor and travel costs.

 

Professional Fees

 

Professional fees for the nine months ended September 30, 2015 were $116,382 as compared to $96,302 for the nine months ended September 30, 2014, representing an increase of $20,080, or 20.85%. Professional fees were comprised of accounting, business services, public relations, audit, and legal fees. The increase in professional fees for this period was attributable primarily to an increase in general legal counsel costs incurred.

 

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense for the nine months ended September 30, 2015 were $26,972 as compared to $26,972 for the nine months ended September 30, 2014, representing no increase or decrease. Depreciation and amortization expense was comprised of amortization of the license fee paid for the technology license, amortization of the debt issue, and depreciation on the property and equipment.

 

General and Administrative

 

General and administrative expense for the nine months ended September 30, 2015 was $27,182 as compared to $34,513 for the nine months ended September 30, 2014, a decrease of $7,331 or 21.24%. General and administrative expense was comprised of expenses for office lease, computer, office supplies, dues and subscriptions, worker’s compensation, disability insurance, printing, telephone, business meals, repairs and maintenance, public relations, advertising, state taxes, business gifts and other miscellaneous items. The decrease in general and administrative expense for this period was attributable to general costs cuts.

 

Interest Expense

 

Interest expense for the nine months ended September 30, 2015 was $179,990 as compared to $179,982 for the nine months ended September 30, 2014. Interest expense was comprised of interest incurred on outstanding long-term debt.

 

Net Loss

 

Our net loss for the nine months ended September 30, 2015 was $424,441, as compared to $432,152 for the nine months ended September 30, 2014, representing a decrease of $7,711, or 1.78%.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

 

To date we have financed our operations through internally government grants, the sale of our common stock and the issuance of debt.

 

At September 30, 2015 and December 31, 2014 we had cash of $75,444 and $25,127, respectively, and working capital deficit of $2,960,922 and $2,766,811, respectively. The decrease in working capital was due to decrease in accounts receivable and increase in current liabilities. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2014 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions.

 

Net cash provided by operating activities was $50,317 for the nine months ended September 30, 2015, as compared to net cash used in operating activities of $84,155 for the nine months ended September 30, 2014. The increase in net cash provided by operating activities was attributable to a decrease in the operating losses offset by a decrease in accounts receivable and an increase in accounts payable.

 

There were no investing activities for the nine months ended September 30, 2015 or September 30, 2014. There was no cash used in investing activities because we did not add to plant and equipment.

 

There were no investing activities for the nine months ended September 30, 2015 or September 30, 2014. There were no capital raising transactions during the reporting period.

 

Since our inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations in the future. In addition, we have $2,400,000 of original issue discount senior secured convertible notes that matured on December 31, 2014 and became past due. Such indebtedness is secured by substantially all of our assets. We are attempting to negotiate with such holders of the notes an extension of the maturity date or an agreement to convert the debt into equity. There can be no assurances that we will be successful in reaching satisfactory agreements with holders of the notes or that we will reach agreement at all. Furthermore, our ultimate success depends upon our ability to raise additional capital. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. If holders of the notes call a default on our indebtedness, then holders of the notes may foreclose on the debt and seize our assets which may force us to suspend or cease operations altogether.

 

 

We will need to raise additional funds in the future so that we can expand our operations and repay our indebtedness due under the original issue senior secured notes. Therefore our continuation as a going concern is dependent on our ability to obtain necessary equity funding to continue operations. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, government grants or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our development plans and possibly cease our operations altogether.

 

Off-Balance Sheet Arrangements

 

Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

N/A.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Changes in Internal Control Over Financial Reporting. During the most recent quarter ended September 30, 2015, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS.

 

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

ITEM 1A. RISK FACTORS.

 

N/A

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

N/A.

 

ITEM 5. OTHER INFORMATION.

 

The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 3.02 Unregistered Sales of Equity Securities”:

 

On October 27, 2015, we issued 3,333,333 shares of common stock for payment of interest in lieu of cash.

 

The securities were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

 

ITEM 6. EXHIBITS.

 

Exhibit Number		Description of Exhibit
31.1		Section 302 Certification of Principal Executive Officer
31.2		Section 302 Certification of Principal Financial Officer
32.1		Section 906 Certification of Principal Executive Officer
32.2		Section 906 Certification of Principal Financial Officer
101		The following materials from Magnolia Solar Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Changes in Stockholders’ Equity (Deficit), (iv) the Consolidated Statements of Cash Flow, and (iv) Notes to Consolidated Financial Statements.

  

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	MAGNOLIA SOLAR CORPORATION
Date: November 13, 2015	By:	/s/ Dr. Ashok K. Sood
		Dr. Ashok K. Sood President, Chief Executive Officer and Director (Principal Executive Officer)
Date: November 13, 2015	By:	/s/ Dr. Yash R. Puri
		Dr. Yash R. Puri Executive Vice-President, Chief Financial Officer and Director (Principal Financial Officer)

  

 

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