EXP World Holdings, Inc. - Quarter Report: 2014 June (Form 10-Q)

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

or

[  ] 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: 333-168025

EXP REALTY INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

1325 Lincoln Street, Suite 1
Bellingham, WA 98229
(Address of principal executive offices and Zip Code)

Registrant’s telephone number, including area code: (360) 685-4206

N/A

(Former name or former address, 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 require to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  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 (of for such shorter period that the registrant was required to submit and post such files). Yes [X]  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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August 14, 2014 the registrant’s outstanding common stock consisted of 48,053,653 shares.

TABLE OF CONTENTS

Statement Regarding Forward-Looking Statements

Certain statements contained in this report on Form 10-Q contains certain forward-looking statements which are intended to be covered by the safe harbors created thereby. All statements, other than statements of historical facts, are forward-looking statements. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “plan,” “should,” “intend,” “may,” “will,” “would,” “potential” and similar expressions identify forward-looking statements, but are not the exclusive means of doing so. Forward-looking statements may include statements about matters such as: future revenues; future industry market conditions; future changes in our capacity and operations; future operating and overhead costs; operational and management restructuring activities (including implementation of methodologies and changes in the board of directors); future employment and contributions of personnel; tax and interest rates; capital expenditures and their impact on us; nature and timing of restructuring charges and the impact thereof; productivity, business process, rationalization, investment, acquisition, consulting, operational, tax, financial and capital projects and initiatives; contingencies; environmental compliance and changes in the regulatory environment; and future working capital, costs, revenues, business opportunities, debt levels, cash flows, margins, earnings and growth.

These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical and current trends, current conditions, possible future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees, representations or warranties and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements. Some of those risks and uncertainties include the risk factors set forth in this report and our Annual Report on Form 10-K for our prior fiscal year ended December 31, 2013, and the following: current global economic and capital market uncertainties; potential dilution to our stockholders from our recapitalization and balance sheet restructuring activities; potential inability to continue to comply with government regulations; adoption of or changes in legislation or regulations adversely affecting our businesses; permitting constraints or delays, business opportunities that may be presented to, or pursued by, us; changes in the United States or other monetary or fiscal policies or regulations; changes in generally accepted accounting principles; geopolitical events; potential inability to implement our business strategies; potential inability to grow revenues organically; potential inability to attract and retain key personnel; assertion of claims, lawsuits and proceedings against us; potential inability to maintain an effective system of internal controls over financial reporting; potential inability or failure to timely file periodic reports with the SEC; potential inability to list our securities on any securities exchange or market. Occurrence of such events or circumstances could have a material adverse effect on our business, financial condition, results of operations or cash flows or the market price of our securities. All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. We undertake no obligation to publicly update or revise any forward-looking statement.

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

eXp Realty International Corporation

(unaudited)

June 30, 2014

EXP REALTY INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

EXP REALTY INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

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

EXP REALTY INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

eXp Realty International Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2014

(Expressed in U.S. dollars)

eXp Realty International Corporation formerly known as Desert Canadians, Ltd. (the “Company” or “eXp”) was incorporated in the State of Delaware on July 30, 2008. In September of 2013 we completed a merger transaction with eXp Acquisition Corp. (surviving corporation) and eXp Realty International Inc. and its subsidiaries. Upon completion of the merger eXp Realty International Inc. ceased to exist. Also in connection with the merger agreement and immediately thereafter our board of directors also approved a change in our fiscal year end from June 30 to December 31.

The Company is a cloud-based real estate brokerage operating in 29 States and in Ontario, Canada. As a cloud-based real estate brokerage for the residential real estate market, eXp has embraced and adopted a number of cloud-based technologies in order to grow an international brokerage without the burden of physical bricks and mortar or redundant staffing costs.

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Basis of Presentation and Fiscal Year

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States, and are expressed in US dollars. All material intercompany accounts and transactions have been eliminated upon consolidation. As disclosed in our 8-K filed September 27^th, 2013 the Company has changed its fiscal year end to December 31.

Use of Estimates

The preparation of financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Foreign currency translation

The Company’s functional and reporting currency is the United States dollar. Occasional transactions may occur in Canadian dollars and management has adopted ASC 740, Foreign Currency Translation Matters. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. The Company has not, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

Other Comprehensive Loss

Other comprehensive loss for the six months ended June 30, 2014 consisted of foreign exchange translation in the amount of $58. Other comprehensive loss for the six months ended June 30, 2013 was nil.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. The objective of this update is to 1) remove inconsistencies and weaknesses in revenue requirements, 2) provide a robust framework for addressing revenue recognition 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. This update is effective in annual reporting periods beginning after December 15, 2016 and the interim periods within that year. The Company will be evaluating the impact of this update as it pertains to the Company’s financial statements and other required disclosures on an on-going basis until its eventual adoption and incorporation.

As of June 30, 2014, the Company was indebted to the CEO of the Company for $5,761 for expenses paid for on behalf of the Company. As of December 31, 2013, the Company was indebted to the CEO of the Company for $18,232 for expenses paid for on behalf of the Company and advances. Amounts due to related parties are non-interest bearing, unsecured and due on demand.

During the six months ended June 30, 2014, we issued 198,333 shares of common stock for cash to investors in private placements of $0.30 per share for receipts of cash totaling $59,450.

The Company has approved the issuance of stock options to certain employees, officers, directors, and service providers at the sole discretion of the Board of Directors.

The Company accounts for stock based compensation based on the intrinsic value of the awards and re-measures the intrinsic value at each reporting date through the date of exercise or other settlement. The final measure of compensation cost is recognized at the intrinsic value of the instrument at the date it is settled. Compensation cost for each period until settlement is based on the change in the intrinsic value of the instrument in each reporting period.

The Company’s currently issued stock options vest over periods ranging from 0 to 4 years and are exercisable for a period of 10 years.

The Company’s stock option activity is as follows:

For the six months ended June 30, 2014 the Company’s stock options had an intrinsic value between $0.03 and $0.17. The Company recognized stock option expense of $51,714 and $268,627 for the six months ended June 30, 2014 and June 30, 2013, respectively.

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of management the ultimate liability with respect to current proceedings and claims will not have a material adverse effect upon the Company’s financial position or results of operations.

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

The following discussion should be read together with our financial statements and related notes appearing elsewhere in this report. This discussion contains forward-looking statements based upon current expectations that involve numerous risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Those reasons include, without limitation, those described at the beginning of this report under “Statement regarding forward-looking statements,” as well as those that may be set forth elsewhere in this report. Except as otherwise required by law, we do not intend to update any information contained in these forward-looking statements. The following discussion also addresses matters we consider important for an understanding of our financial condition and results of operations as of June 30, 2014, and for the three and six month period ended June 30, 2014, as well as our future results.

OVERVIEW

eXp Realty International Corporation, formerly known as Desert Canadians, Ltd. (the “Company” or “eXp”), was incorporated in the State of Delaware on July 30, 2008. In September of 2013 we completed a merger transaction with eXp Acquisition Corp. (surviving corporation) and eXp Realty International Inc. and its subsidiaries. Upon completion of the merger eXp Realty International Inc. ceased to exist. Also in connection with the merger agreement and immediately thereafter our board of directors also approved a change in our fiscal year end from June 30 to December 31.

The Company is a cloud-based real estate brokerage operating in 29 States and in Ontario, Canada. As a cloud-based real estate brokerage for the residential real estate market, eXp has embraced and adopted a number of cloud-based technologies in order to grow an international brokerage without the burden of physical bricks and mortar or redundant staffing costs.

RECENT BUSINESS DEVELOPMENTS

The Company has continued its geographic expansion into new US States (and into sub-markets within those states). The Company added approximately 50 new agents during the three months ended June 30, 2014 and 70 new agents during the six months ended June 30, 2014. 

In early 2014 the Company launched a new customized transaction management platform designed further to streamline our transaction management and administrative functions enabling scalable growth without the immediate necessity of significant increases in staffing. The new platform offers our agents and brokers enhanced reporting features and report generating capabilities and will, in the next phase of its development expected to be completed later this year, provide agents and brokers with access to critical information relative to the composition and production of agent and broker teams that they have assembled and grown as well as the revenue share dollars derived from those efforts.

In the remaining months of 2014, the Company expects to continue to introduce and execute on a number of initiatives aimed at accelerating expansion and looks fully to integrate a number of systems that will support its scalable growth. Presently, both the Company’s rate of growth based on agent count, as well as its rate of retention among existing agents has increased. We believe this increase is at least partially attributable to a number of initiatives implemented earlier this year, including the establishment and fulfillment of the role of Director of Cloud Leadership and Growth, whose role is geared towards helping advance areas of opportunity for expansion, as well the identification, evaluation and pursuit of system and process enhancements and additions that will best support the scalable growth that the role aims to achieve. To that end, in 2014 the Company looks forward to introducing and fully integrating a platform for all of its agents that will enable and provide both Company and agent websites that will give end consumers an experience that, over time, the Company believes will ultimately rival those made available and controlled by some of the larger non-brokerage aggregators of data across marketplaces and their websites. We expect that these company and agent websites will be fully functional on all devices, including mobile devices, and will include IDX (Internet Data Exchange) and customer relationship management (CRM) features. This process will permit the Company more efficiently to provide optimized sites, capable of increased consumer lead generation benefiting the agent; and, will permit the Company to further harness and aggregate Multiple Listing Service data in a more centralized yet farther-reaching manner, effectively syndicating data across increased numbers of channels. In this regard, the Company maintains a competitive advantage through its sizeable geographic footprint which grants it access to, at present, some 45 different property data and listing services (“Multiple Listing Services”) across its markets. These listing services generate and possess the data that feeds most, if not all, of the IDX feeds that aggregate into the large web-based, consumer-facing data aggregators. In addition, this initiative will help the Company identify and address any redundancies that may exist in the present development, optimization, maintenance and expense associated with some of the Company’s existing web-based assets.

The Company has also introduced in 2014 a formal, dedicated “support” role for its agents and brokers which has helped to streamline and improve an introduction to new agents, maintain agent access, adoption, engagement, participation, education and socialization. This has allowed the Company to leverage its technological advantages and continue to pave a path to an increasingly robust culture of collaboration across borders, personal interaction among agents and staff; continued entry into new markets both domestic and abroad at relatively minimal cost; and, an enhanced consumer service and experience, all of which ultimately should assist the Company as it continues to foster and sustain improved rates of growth and retention on a consistent basis.

The Company will continue to look for additional ways to create efficiencies within its technology and web-development team, allowing it further to leverage the Company’s technological capabilities and expertise and to build upon the value that it offers to buyers and sellers of real estate while maintaining a streamlined approach without compromising quality. The Company will continue to explore and identify potential strategic partners that have developed technologies, applications or other proprietary assets of value within the real estate space and that would benefit from access to the resources we possess internally as well as those made possible by our geographic reach, mobility and interconnectivity. The Company also expects to continue to make available to its agents opportunities for savings and efficiency in pursuit of their business goals and career objectives whenever possible whether in the form of discounts or service enhancements, continuing education opportunities, or otherwise.

On a going-forward basis, the Company expects to continue to identify opportunities where it may enter into relationships with providers of goods and services who share the Company’s commitment to client service, technology, culture, and it’s commitment to ethics and integrity; the business needs and wants of its agents; and, who can market their products and services in furtherance of those shared values.

In pursuit of the vision of becoming a brokerage that, uniquely within the industry, is owned to a substantial degree by its agents and brokers, the Company introduced in March of 2014 its Agent Ownership initiative in which the Company’s agents and brokers have opportunities to earn equity awards upon accomplishment of prescribed production and recruiting goals. Since its inception, the Company has recognized the successes of a significant number of agents and brokers as a result of the initiative, which has helped the Company:

In 2014, the Company plans to recognize additional “Agent Owners” and still plans to adopt an omnibus equity incentive plan, which would allow for a variety of equity-related awards as well as a plan that will permit the voluntary allocation by agents of a percentage of gross commission income on transactions and/or revenue share dollars earned to the purchase of Company stock. The details of these plans are still being formulated.

The existence of equity incentives aided the Company in incentivizing the migration of a 19 agent team in Atlanta, Georgia in September, 2013. This migration, in addition to growing the Company, allowed the Company to test and measure the effectiveness of its processes and systems for the integration of large teams of agents or groups of agents that comprise an entire brokerage. As of July 31, 2014 the size of the Company’s agent and broker population in the Greater Atlanta Metro Region has nearly tripled since October 2013 and the Company has retained nearly all of the agents and brokers who joined it last October and who have joined since. Based on the success of this migration and on the technological, human and financial resources at its disposal, the Company plans to continue to attract increasing numbers of sizeable agent and brokerage teams across its markets in 2014 and to continue successfully to integrate them into the Company’s culture and infrastructure. To this end, at present, conversations are ongoing and, in some cases, are in advanced stages with a wide range of teams and brokerages that have expressed a desire to join the Company, both domestically and internationally. We believe that the Company has (and will continue to augment) the systems and processes in place to replicate the growth and retention success demonstrated in Georgia.

The Company continues to receive numerous expressions of interest from parties whose principal business is in the brokerage of commercial real property. The Company expects to continue to seek to determine the feasibility of various ways in which to accommodate this interest and potentially pursue the engagement of this segment of the real estate industry.

MARKET CONDITIONS AND TRENDS

eXp estimates over 50% of real estate brokerages today are not profitable due to the impact of high or fixed overhead and a costly struggle to drive higher productivity among their agents. These brokerages (many small to medium size) want to keep their long-term branding and reputation for excellence but want out from under their high costs to operate. Their current cost structure isn’t responsive to cyclical turns and the overhead costs continue to climb. The way in which buyers and sellers of real estate conduct research, initiate appointments, and even make offers has ever increasingly shifted from the traditional retail office to various online technologies. Even the most successful, established, and credible owners in the industry are struggling to remain competitive in the eyes of the agents they need to attract, retain and compensate in order to remain profitable.

Our Cloud Office has enabled brokerage owners to shed enormous overhead expenses and staffing costs while still retaining a percentage of commissions generated by their agents. Brokers through the use of our technology can now add additional agents and leverage their professional reputation and credibility both within and outside of their local or regional markets at little to no expense. The Cloud Office provides a scalable solution and a return to profitability for these existing small to medium sized brokerage owners.

The United States housing market was adversely impacted beginning in 2006 by the combination of a number of factors, including but not limited to more stringent lending guidelines, increased unemployment, and an overall macroeconomic decline. Overall U.S. sales volume declined as did the market value of homes which in turn created a swell in foreclosures and mortgage defaults. Data relative to the amount of time a property takes to sell, units available for resale, and pricing suggests that throughout much of the United States, markets have recovered even as borrowing costs for mortgages increased from historic lows, as tightened lending standards remain in place and as new qualified mortgage rules, introduced in January 2014, took effect. Market conditions prospectively are susceptible to impact from, among other factors, employment growth or decline, population trends, the re-entry into the market of former homeowners who suffered delinquencies, foreclosures, short-sales, or bankruptcies during the downturn, and changes in Federal Reserve monetary policy and federal fiscal policy. In addition, in most markets (the these trends can vary among markets depending on climate), activity still tends to fluctuate in accordance with the calendar, even as technological innovations have made it easier for consumers to research, evaluate and buy and sell property irrespective of season.

Based on these among other factors we expect to see continued growth in sales within the real estate industry in the upcoming fiscal year.

COMPARATIVE FINANCIAL INFORMATION FROM OUR RESULTS OF OPERATIONS

Three months ended June 30, 2014

Revenues

During the current three month period ended June 30, 2014 net revenues increased $384 thousand to $3.55 million as compared to the prior three month period ended June 30, 2013 when we generated $3.17 million. The increase as compared to the prior period is a direct result of the increased sales agent base and higher sales volume realized.

Operating Expenses

Cost of revenues includes costs related to sales agent commissions and revenue sharing. These costs are highly correlated with recognized net revenues. As such, the increase of $359 thousand in the current three month period ended June 30, 2014 as compared to the prior three month period ended June 30, 2013 was driven by the higher amount of net revenues and agent commission rates.

General and administrative includes costs related to wages, stock compensation, dues, operating leases, utilities, travel, and other general overhead expenses. The decrease in general and administrative costs in the three month period ended June 30, 2014 as compared to the three month period ending June 30, 2013 was driven from a decrease in stock compensation expense of $88 thousand and stock option expense of $34 thousand which was offset by increased payroll and dues and subscriptions.

Professional fees include costs related to legal, accounting, and other consultants. Costs decreased $48 thousand during the three month period ending June 30, 2014 as compared to the three month period ended June 30, 2013 due to less legal and audit fees associated with the prior year merger and audit related costs completed.

Sales and marketing include costs related to lead capture, digital and print media, trade shows, in addition to other promotional materials. The Company spent less in print marketing in the three month period ending June 30, 2014 as compared to the three month period ending June 30, 2013.

Six months ended June 30, 2014

Revenues

During the current six month period ended June 30, 2014 net revenues increased $795 thousand to $5.93 million as compared to the prior six month period ended June 30, 2013 when we generated $5.14 million. The increase as compared to the prior period is a direct result of the increased sales agent base and higher sales volume realized.

Operating Expenses

Cost of revenues includes costs related to sales agent commissions and revenue sharing. These costs are highly correlated with recognized net revenues. As such, the increase of $795 thousand in the current six month period ended June 30, 2014 as compared to the prior six month period ended June 30, 2013 was driven by the higher amount of net revenues and agent commission rates.

General and administrative includes costs related to wages, stock compensation, dues, operating leases, utilities, travel, and other general overhead expenses. The decrease in general and administrative costs in the six month period ended June 30, 2014 as compared to the six month period ending June 30, 2013 was driven from a decrease in stock compensation expense of $63 thousand and stock options expense of $217 thousand which was offset by increased payroll, dues and subscriptions, and other miscellaneous expenses.

Professional fees include costs related to legal, accounting, and other consultants. Costs decreased $24 thousand during the six month period ending June 30, 2014 as compared to the six month period ended June 30, due to less legal and audit fees associated with the prior year merger and audit related costs completed.

Sales and marketing include costs related to lead capture, digital and print media, trade shows, in addition to other promotional materials. The Company spent approximately $12 thousand less in direct email and print marketing related activities in the six month period ending June 30, 2014 as compared to the six month period ending June 30, 2013.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s net working capital increased $189 during the current six month period ending June 30, 2014 as compared to December 31, 2013.

The following table presents our cash flows for the six months ended June 30, 2014 and 2013:

Net cash provided by operating activities for the six months ended June 30, 2014 was approximately $79 thousand as compared to an amount provided by of $192 thousand for the six months ended June 30, 2013. Our cash provided by operations the first six months of 2014 was primarily caused from increases in accrued expenses of $188 thousand and offset from increases in accounts receivable of $95 thousand and prepaid expenses of $43 thousand respectively. Cash provided by operating activities for the first six months ended 2013 was primarily generated from operations in addition to decreases in accounts receivable of $30 thousand in addition to increases of accrued expenses of $43 thousand.

Net cash used in investing activities for the acquisition of fixed assets was $33,000 and $493 for the six months ended June 30, 2014 and June 30, 2013 respectively.

Net cash provided by financing activities for the six months ended June 30, 2014 comprised of $59 thousand of net proceeds from the issuance of restricted common stock. Net cash provided by financing activities for the six months ended June 30, 2013 comprised of $85 thousand of net proceeds from the issuance of common stock, which was partially offset from principal payments of $15 thousand on an outstanding notes payable obligation.

Our future capital requirements will depend on many factors, including our level of investment in technology and our rate of growth into new markets. Our capital requirements may be affected by factors which we cannot control such as the residential real estate market, interest rates, and other monetary and fiscal policy changes in which we currently operate. We may have a greater need to fund our business by using our cash and cash equivalents, which could not continue indefinitely without raising additional capital. We believe that we currently have sufficient liquidity and capital resources to meet our existing obligations over the next twelve months.

We currently have no bank debt or line of credit facilities. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business and results of operations will likely suffer.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

We currently have one debt obligation with a principal balance of $62 thousand accruing interest at 3% and is payable in full during April 2015. We also have non-cancelable operating lease agreements with various expiration dates through August 2014.

OFF-BALANCE SHEET ARRANGEMENTS

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

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, as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report we carried out an evaluation of the effectiveness of our disclosure controls and procedures with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information was not accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

The determination that our disclosure controls and procedures were not effective was based on the following material weaknesses in our internal control over financial reporting, which were identified in our Annual Report on Form 10-K for the year ended December 31, 2013:

In light of these material weaknesses, we performed additional analysis and procedures in order to conclude that our financial statements included in this report were fairly stated in accordance with accounting principles generally accepted in the United States. Accordingly, we believe that despite our material weaknesses, our financial statements included in this report are fairly stated, in all material respects, in accordance with United States generally accepted accounting principles.

CHANGES IN INTERNAL CONTROL

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the three months ended June 30, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.     LEGAL PROCEEDINGS

From time to time, we are involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. There are no matters pending or threatened that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.

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

During the six months ended June 30, 2014 the Company issued 198,333 shares of restricted common stock for net cash proceeds of $59,450 at a price of $0.30 per share. We issued these shares to U.S. individuals, relying on section 4(A)(2) of the Securities Act of 1933.

No repurchases of the Company’s equity securities were made by the Company or “affiliated purchasers” during the three months ended June 30, 2014.

Item 3.     DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.     MINE SAFETY DISCLOSURES

Not applicable.

Item 5.     OTHER INFORMATION

None.

Item 6.     EXHIBITS

SIGNATURES

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