FINDEX COM INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

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: 0-29963

FINDEX.COM, INC.

(Exact name of registrant as specified in its charter)

(561) 328-6488

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [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 (or 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 ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [_] No [_]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At November 12, 2019 the registrant had outstanding 722,836,769 shares of common stock, of which there is only a single class.

FINDEX.COM, INC.

QUARTERLY REPORT ON FORM 10-Q

- INDEX -

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Findex.com, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2019

(Unaudited)

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Findex.com, Inc. (“Findex”) was incorporated under the laws of the State of Nevada on November 7, 1997, and is headquartered in Lake Park, Florida with its base of business operations co-located in the same facility. The Company is currently comprised of two operating companies, RexPro Sealers and Coatings (“RexPro”), a Florida corporation (formerly EcoSmart Surface & Coating Technologies, Inc.), and Advanced Cement Sciences, LLC, a Florida limited liability company (“ACS”). RexPro has historically been the driver of both operating overhead and revenue. RexPro was acquired by the Company in a merger in 2014 and centers around a proprietary line of specialty surface coatings that have a broad range of value-adding industrial, commercial, residential and consumer applications. ACS is a Florida-based, engineered cement technology and products firm founded in mid-2016 and currently focused on developing and commercializing a line of proprietary admixtures to be used in the production of ultra-lightweight, high-strength concrete and high-performance stucco.

BASIS OF PRESENTATION

The accompanying 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 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. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal and reoccurring adjustments, that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future period. The December 31, 2018 condensed consolidated balance sheet data was derived from audited financial statements. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Findex.com, Inc. included in the Company’s Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on April 16, 2019.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries (Reagan Holdings, Inc., Findex.com, Inc. Delaware, ESCT Acquisition Corp. and ACS). All inter-company balances and transactions have been eliminated in consolidation.

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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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. Significant estimates include an evaluation for slow moving and obsolete inventory, collectability of accounts receivable, assessing intangibles for impairment, useful lives of assets, and valuation of stock based compensation and settlements and consideration of variable interest entities.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE

Within the Company’s operations as a whole, the Company’s products are sold to resellers and distributors generally under terms appropriate for the creditworthiness of the customer. Terms generally range from cash on delivery, net 10 days or net 30 days. Receivables from customers are unsecured. The Company continuously monitors its customer account balances and actively pursues collections on past due balances.

The Company maintains an allowance for doubtful accounts comprised of two components, (i) historical collections performance and (ii) specific collection issues. If actual bad debts differ from the reserves calculated based on historical trends and known customer issues, an adjustment to bad debt expense is recorded in the period in which the difference occurs. Such adjustment could result in additional expense or a reduction of expense.

The Company’s accounts receivable go through a collection process that is based on the age of the invoice and requires attempted contacts with the customer at specified intervals and the assistance from other personnel within the Company who have a relationship with the customer. If after a number of days, the Company has been unsuccessful in its collections efforts, it may turn the account over to a collection agency. The Company writes-off accounts to the allowance when it has determined that collection is unlikely. The factors considered in reaching this determination are (i) the apparent financial condition of the customer, (ii) the success the Company has in contacting and negotiating with the customer and (iii) the number of days the account has been outstanding. To the extent that the Company’s collections do not correspond with historical experience, it may be required to incur additional charges.

INVENTORY

The Company’s inventories are recorded at the lower and cost or market using the first in, first out method. The Company’s inventory consists of raw materials and finished goods. The Company takes into consideration certain inventory items that are slow moving and obsolete and calculates a provision for these inventory items.

INTANGIBLE ASSETS OTHER THAN GOODWILL

The Company’s intangible assets consist of patents and trade secrets acquired from third parties, and are recorded at accumulated cost less amortization and impairments. In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 350-30, General Intangibles Other Than Goodwill, intangible assets with an indefinite useful life are not amortized. Intangible assets with a finite useful life are amortized on the straight-line method over the estimated useful lives, approximately 11 years. All intangible assets are tested for impairment annually during the fourth quarter. For the nine months ended September 30, 2019 and 2018, the Company did not recognize any impairment expense related to intangible assets. See Note 5.

REVENUE RECOGNITION

The Company recognizes revenues in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the Securities and Exchange Commission. ASC 606 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. The Company recognizes revenue upon transfer of control of promised products to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products. The Company at times may enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In such cases, revenue would be recognized at the time of delivery for each identified product or performance of service. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Distribution Rights

The Company at times may derive part of its revenue from the sale of distribution rights within a designated territory for a period of time. Licenses for an exclusive territory provides a single distributor with the right to use and sell the distribution rights within the specified designated territory for a specified period. The determination of when the Company recognizes revenue is based on whether the distribution rights transfers to the distributor at (i) a point in time or (ii) over time. Furthermore, the Company needs to determine in accordance with ASC 606 if the distribution rights is (i) functional intellectual property that has significant standalone functionality or is (ii) symbolic intellectual property that requires ongoing activities from the Company. In June 2018, the Company received payment in the amount of $100,000 from the sale of distribution rights within a designated territory for a period of time of thirty years to a distributor. In August 2018, the Company received an additional payment in the amount of $90,000 for the sale of distribution rights within a separate designated territory for a period of thirty years to a distributor. The Company determined that the associated revenue would be recognized over the period of thirty years as the agreements for the sale of the distribution rights also called for the Company to continue to produce the product for the distributor over the term of the agreements. Therefore, the distribution rights were deemed to be symbolic intellectual property in accordance with ASC 606 as it requires ongoing activities from the Company.

From time to time, and where strategic determinations or economic considerations dictate, the Company also derives revenue from the sale of its intellectual properties (proprietary formulations) into select vertical markets. The Company continues to enhance and improve upon certain of its intellectual properties currently used in non-core vertical markets as well as develop new variations on its existing portfolio of intellectual properties. The determination of when the Company recognizes revenue is based on whether the following two criteria are met (i) the customer can benefit from the intellectual property either on its own or together with other resources that are readily available to the customer, and (ii) the Company’s promise to transfer the intellectual property is distinct within the context of the contract. In August 2019, the Company entered into an intellectual property sale and assignment agreement with a now exclusive worldwide HVAC distributor in exchange for a one-time cash payment of $200,000. The agreement includes a provision establishing a transitional manufacturing period of no less than six months during which the Company will continue to manufacture the product for the HVAC marketer and distributor at a predetermined, fixed-price per gallon. This agreement supersedes all prior agreements with the counter-party (specifically, the June 2018 and August 2018 agreements referenced in the immediately preceding paragraph), and, as such, triggers immediate recognition of the remaining contract liabilities under the previous distribution agreements. For the nine months ended September 30, 2019 and 2018, the Company recognized a contract liability in the amount of $0 and $188,639, respectively and revenue in the amount of $387,056 and $1,361, respectively from such sales of intellectual property and distribution rights. In addition, for the nine months ended September 30, 2019, the Company recognized additional contract liability in the amount of $9,200 as a result of advanced payments received from customers for performance obligations yet to be performed by the Company.

RESEARCH AND DEVELOPMENT

The Company’s research and development costs consist of labor directly associated with the development of projects and outside consultants, and indirect costs such as those associated with facilities use. For labor costs and costs of outside consultants, the Company records the research and development costs as a reduction against either personnel costs or professional fees. For facilities leasing related expenses, the Company records the research and development costs as a reduction against rent. For the nine months ended September 30, 2019 and 2018, the Company recognized $24,268 and $180,760, respectively, in research and development costs.

PREFERRED STOCK

In May 2019, the Company’s board of directors, pursuant to its authority to designate serial preferred stock from time to time under Article V Section B of the Company’s Articles of Incorporation (as amended to date, the “Company Articles”), adopted a resolution providing for the designation, powers, preferences, privileges, limitations, restrictions, and relative rights and terms of (i) one million five hundred thousand (1,500,000) shares of Series RX-1 Redeemable, Convertible Preferred Stock, par value $0.001 per share (the “Series RX-1 Preferred Stock”), (ii) one million (1,000,000) shares of Series RX-2 Convertible Preferred Stock, par value $0.001 per share (the “Series RX-2 Preferred Stock”) and (iii) five hundred thousand (500,000) shares of Series RX-3 Convertible Preferred Stock, par value $0.001 per share (the “Series RX-3 Preferred Stock”). The Company filed certificates of designations amending the Company Articles and reflecting the Series RX-1 Preferred Stock, Series RX-2 Preferred Stock and the Series RX-3 Preferred Stock with the Nevada Secretary of State.

The Series RX-1 Preferred Stock carries the following rights, preferences and privileges:

All of the foregoing notwithstanding, the Series RX-1 Preferred Stock is redeemable by the Company at any time prior to conversion at a price of $1.00 per share.

The Series RX-2 Preferred Stock carries the following rights, preferences and privileges:

The Series RX-3 Preferred Stock carries the following rights, preferences and privileges:

As of September 30, 2019, the Company has outstanding 1,418,615 shares of RX-1 Preferred Stock and -0- and -0-, respectively, shares of RX-2 Preferred Stock and RX-3 Preferred Stock. Furthermore, as of September 30, 2019, the Company has outstanding six warrants to purchase a total of 981,316 shares of RX-2 Preferred Stock and three warrants to purchase a total of 481,212 shares of RX-3 Preferred Stock. For the nine months ended September 30, 2019, no preferred stock warrants were exercised. See Note 10.

STOCK-BASED COMPENSATION

The Company recognizes share-based compensation in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 requires that the Company measure the cost of the employee services received in exchange for an award for equity instruments based on the grant-date fair value and to recognize this cost over the requisite service period. See Note 10.

EARNINGS (LOSS) PER SHARE

The Company follows the guidance of ASC 260, Earnings Per Share, to calculate and report basic and diluted earnings per share (“EPS”). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed by giving effect to all dilutive potential shares of common stock that were outstanding during the period. For the Company, dilutive potential shares of common stock consist of the incremental shares of common stock issuable upon the exercise of warrants for all periods and convertible preferred stock and notes payable.

When discontinued operations, extraordinary items, and/or the cumulative effect of an accounting change are present, income before any of such items on a per share basis represents the “control number” in determining whether potential shares of common stock are dilutive or anti-dilutive. Thus, the same number of potential shares of common stock used in computing diluted EPS for income from continuing operations is used in calculating all other reported diluted EPS amounts. In the case of a net loss, it is assumed that no incremental shares would be issued because they would be anti-dilutive. In addition, certain options and warrants are considered anti-dilutive because the exercise prices were above the average market price during the period. Anti-dilutive shares are not included in the computation of diluted EPS, in accordance with ASC 260-10-45-17.

The calculations of net income per share for the nine months ended September 30, 2019 and 2018 excluded the impact of the following potential common shares as their inclusion would be anti-dilutive.

The Outstanding Warrants - Series RX-2 and RX-3 were excluded from diluted earnings per share because the contingencies in place to exercise and vest these shares did not take place and were not probable to occur as of September 30, 2019.

For the three and nine months ended September 30, 2019 and 2018 there were not adjustments to earnings for earnings per share calculations. Dilutive potential common shares were determined as follows:

DISCONTINUED OPERATIONS

As of September 30, 2019 and 2018, the Company has presented $114,368 of Accrued royalties in discontinued operations. The royalties pertain to the Company’s sale of the QuickVerse® product line in 2011. There were no effects on the Company’s Condensed Consolidated Statements of Operations for the nine months ended September 30, 2019 and 2018. See Note 13.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, Leases. The standard requires all leases with lease terms over 12 months to be capitalized as a right-of-use asset and lease liability on the balance sheet at the date of lease commencement. Leases will be classified as either finance or operating. This distinction will be relevant for the pattern of expense recognition in the income statement. This standard is effective for the calendar year ending December 31, 2019. The Company does not have any leases that qualify under the new standard.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment. The standard simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments of ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for the calendar year ending December 31, 2020. The amendments require a prospective approach to adoption and early adoption is permitted for interim or annual goodwill impairment tests. The Company is presently evaluating the impact this standard would have.

NOTE 2 – GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates the Company’s continuation as a going concern. However, as of September 30, 2019, the Company had negative working capital of $530,326, an accumulated deficit of $7,213,864, a net income of $1,752,826 and cash used from operations of $66,390. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has taken several actions in an attempt to mitigate this risk. These actions include capital raising initiatives involving the issuance of equity and/or notes payable to investors, as well as cash conservation initiatives involving the issuance of equity and/or notes payable to employees and related parties. The accompanying condensed consolidated financial statements do not include any adjustments related to these uncertainties.

NOTE 3 – INVENTORIES

Inventories consisted of the following:

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

For the nine months ended September 30, 2019 and 2018, the Company recorded depreciation expense of $2,188 and $4,195 respectively.

NOTE 5 – INTANGIBLE ASSETS

The Company’s intangible assets consist of patents and trade secrets acquired from third parties, and are recorded at cost. The Company amortizes the costs of its intangible assets over their estimated useful lives of approximately 11 years. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested for impairment, at least annually, and written down to fair value as required.

The Company’s intangible assets, net of accumulated amortization consisted of the following:

The Surface Modification Technologies assets include a patent and trade secrets on certain manufacturing processes and know-how. For the nine months ended September 30, 2019 and 2018, the Company recorded amortization expense of $36,359 and $35,635, respectively. See Note 1.

As of September 30, 2019, future amortization for the next four years for the Company’s intangible assets consist of the following:

NOTE 6 – NOTES PAYABLE AND NOTES PAYABLE - RELATED PARTIES

At September 30, 2019 and December 31, 2018, notes payable consisted of the following categories:

Notes Payable

Notes payable consisted of two unsecured notes. The first note payable in the amount of $28,783 as of September 30, 2019 and December 31, 2018, respectively, is to a former shareholder with a due date of January 2012, together with accrued interest at 5% APR and interest on overdue principal accruing at 10% APR. The second note payable in the amount of $0 as of September 30, 2019 and $300,000 as of December 31, 2018 was to a shareholder with a due date of August 1, 2015, together with accrued interest at 10% APR. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a total of 324,262 shares of the Company’s Series RX-1 preferred stock in exchange for the $300,000 of debt owed, inclusive of accrued interest (total $458,729). See Note 10.

At September 30, 2019, the Company was in default for the unsecured note payable in the amount of $28,783 and all related accrued interest.

Notes Payable, Convertible

Notes payable, convertible consisted of one note payable in the amount of $0 as of September 30, 2019 and $25,000 as of December 31, 2018 to an investor with a due date of January 20, 2018, together with accrued interest at 10% APR and was convertible at $0.01 per share of common stock. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a total of 26,568 shares of the Company’s Series RX-1 preferred stock in exchange for the $25,000 of debt owed, inclusive of accrued interest (total $34,952). See Note 10.

Notes Payable, Related Parties

Notes payable, related parties consisted of the following:

At September 30, 2019, the Company was in default with the contractual payment terms with the unsecured term note payables (b), (c), (d) and (e) to an independent contractor, also a minority shareholder.

Notes (a) and (g) reflect debt investments made by the Company’s general counsel, who is also a principal shareholder, to the Company. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a total of 17,759 shares of the Company’s Series RX-1 preferred stock in exchange for the $7,000 and $10,000 notes payable, inclusive of accrued interest (total $21,137). See Note 10.

Note (f) reflects two unsecured notes payable for payment obligations owed to the Company’s general counsel, who is also a principal shareholder, for legal services incurred by the Company for the years ended December 31, 2015 and 2014. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for a total of 110,416 shares of the Company’s Series RX-3 preferred stock in exchange for the $270,000 of debt owed, inclusive of accrued interest (total $324,856). See Note 10.

Note (h) reflects two unsecured notes payable for amounts due to the Company’s president and chief executive officer, who is also a principal shareholder, for previously accrued base salary. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for a total of 170,009 shares of the Company’s Series RX-3 preferred stock in exchange for the $436,861 of debt owed, inclusive of accrued interest (total $489,566). See Note 10.

Note (i) reflects two unsecured notes payable for amounts due to the Company’s controller, who is also a shareholder, for previously accrued base salary. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for a total of 63,291 shares of the Company’s Series RX-3 preferred stock in exchange for the $162,614 of debt owed, inclusive of accrued interest (total $182,413). See Note 10.

On December 24, 2018, and in connection with the Company’s acquisition of Advanced Cement Sciences LLC, each holder of notes (f), (h) and (i) agreed to relinquish their previous respective rights of conversion on the Company promissory notes held by them.

Notes Payable, Related Parties, Convertible

Notes payable, related parties, convertible consisted of the following:

Notes (a), (b) and (l) reflect amounts due to a single outside director of the Company, who also is a principal shareholder, based on such director having (i) made certain vendor obligation payments directly on behalf of and for the benefit of the Company, (ii) having advanced certain funds to the Company at various dates for general working capital purposes, and (iii) having accrued director’s fees earned through June 30, 2017. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of note (a) a total of 65,396 shares of the Company’s Series RX-1 preferred stock in exchange for $60,000 of debt owed, inclusive of accrued interest (total $73,560). The Company also issued the holder of note (b) a total of 32,367 shares of the Company’s Series RX-1 preferred stock and a warrant for the total of 187,396 shares of the Company’s Series RX-2 preferred stock in exchange for the cumulative $114,000 of debt owed, inclusive of accrued interest (total $130,281). In addition, the Company has recorded accounts payable, related parties, in the amount of $18,426 to the holder of notes (a), (b), and (l). See Note 10.

Notes (c), (e) through (h) and (o) reflect amounts due to a certain related party investor and principal shareholder for convertible debt investments made from time to time as indicated. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a total of 822,639 shares of the Company’s Series RX-1 preferred stock in exchange for the cumulative $800,000 of debt owed, inclusive of accrued interest (total $1,070,974). See Note 10.

Note (d) reflects an amount due to a certain related party investor and principal shareholder for convertible debt investments made from time to time as indicated. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a total of 52,325 shares of the Company’s Series RX-1 preferred stock in exchange for $50,000 of debt owed, inclusive of accrued interest (total $69,041). See Note 10.

Notes (i) reflects two notes payable for amounts due to an outside director, who is also a minority shareholder, for accrued director’s fees earned through June 30, 2017. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for a total of 66,966 shares of the Company’s Series RX-2 preferred stock in exchange for $30,000 of debt owed, inclusive of accrued interest (total $33,483). See Note 10.

Note (j) reflects amounts due to the Company’s former vice president of research and development, who is also a minority shareholder, for previously accrued wages. In May 2019, the holder of the note exercised the right to convert the $49,000 note, inclusive of accrued interest (total $55,237) into 7,890,958 shares of common stock at the conversion rate of $0.007 per share per the terms of the note. See Note 10.

Note (k) reflects amounts due to an independent contractor who had served as a senior executive of one of the Company’s predecessor divisions prior to the merger with the Company and a current minority shareholder of the Company, for past earnings. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a warrant for a total of 58,006 shares of the Company’s Series RX-2 preferred stock in exchange for $25,700 of debt owed, inclusive of accrued interest (total $29,003). See Note 10.

Note (m) reflects two notes payable for amounts due to an independent contractor, who is also minority shareholder, for previously accrued business development services. On October 31, 2018, the holder of one note with an original face value of $137,500 exercised the right to convert $60,000 of the note into six million shares (6,000,000) of common stock at the conversion rate of $0.01 per share per the terms of the note. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for a total of 337,320 shares of the Company’s Series RX-2 preferred stock in exchange for $158,780 of debt owed, inclusive of accrued interest (total $168,660). See Note 10.

Note (n) reflects an amount due to a certain related party investor, who is also a minority shareholder, for a convertible debt investment. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a total of 20,483 shares of the Company’s Series RX-1 preferred stock in exchange for $20,000 of debt owed, inclusive of accrued interest (total $22,580). See Note 10.

For the nine months ended September 30, 2019, the Company did not receive any proceeds from the issuance of notes payable. For the year ended December 31, 2018, the Company received proceeds from the issuance of notes payable to related parties in the amount of $20,000 and convertible notes payable to related parties in the amount of $70,000 (total $90,000).

NOTE 7 – GAIN ON INTANGIBLE ASSET

In February 2019, the Company entered into an agreement with Ducora, Inc., a Florida corporation engaged in the direct marketing of certain consumer products (“Ducora”), to assign and sell to Ducora a patent owned by the Company, together with certain related and proprietary trade secret information, the subject of which is a process for producing a certain coating product usable on automobiles and motorcycles, among other potential surfaces. At December 31, 2018, the Company did not have a value assigned to the intangible assets consisting of the patent and proprietary trade secret information. In exchange for the conveyance of this intellectual property, which was effective immediately upon execution of the agreement, the Company received a one-time cash payment in the amount of $150,000. As a result, the Company recognized a gain on the sale of an intangible asset of $150,000 on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.

NOTE 8 – GAIN ON DEBT SETTLEMENT

In June 2019, the Company finalized a debt restructuring initiative with the Company’s then debtholders. In particular to one of the Company’s previous investors who held a note payable and was not a related party or shareholder of the Company, the note holder agreed to settle such note in exchange for the Company’s Series RX-1 preferred stock. As a result, the Company recognized a gain on debt settlement of $34,925 on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.

NOTE 9 – GAIN ON DERIVATIVE-BASED RESTRUCTURING OF SERVICE-RELATED OBLIGATIONS

In June 2019, pursuant to certain securities exchange agreements and securities purchase agreements between the Company and certain of its directors and current and former employees, and in exchange for an aggregate $490,658 in debt owed to such parties as of such dates, inclusive of accrued interest, (a portion of which debt had been convertible into Company common stock in accordance with its stated terms and the remainder of which had not), the Company issued to such individuals warrants to purchase a total of 981,316 shares of Company Series RX-2 preferred stock at a price per share of $0.50 for a gain of $182,523. Also in June 2019, pursuant to certain securities exchange agreements and securities purchase agreements between the Company and certain of its outside professional consultants and employees, and in exchange for a gain of $1,397,644 in debt owed to such parties as of such dates, inclusive of accrued interest, (a portion of which debt had at one point in time been convertible into Company common stock in accordance with its stated terms and the remainder of which had not), the Company issued to such individuals warrants to purchase a total of 481,212 shares of Company Series RX-3 preferred stock at a price per share of $5.00. In connection with this serial restructuring of service-related obligations taken as a whole, and based on the relevant accounting guidance, the Company recognized a gain on restructuring of service-related obligations of $1,580,167 on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.

NOTE 10 – STOCKHOLDERS’ DEFICIT

Common Stock

In May 2019, the Company’s former vice president of research and development (also a shareholder) held a convertible note and elected to convert such note, together with all then-accrued interest, totaling $55,237 into 7,890,958 shares of common stock. See Note 6.

COMMON STOCK WARRANTS

The Company did not issue common stock warrants for the nine months ended September 30, 2019 and 2018 and no common stock warrants were exercised. As of September 30, 2019, there were no common stock warrants outstanding.

PreFERRED Stock

In June, 2019, pursuant to certain securities exchange agreements and securities purchase agreements between the Company and various private investors, and in exchange for an aggregate $1,826,180 in debt owed to such parties, inclusive of accrued interest, (a portion of which debt had been convertible into Company common stock in accordance with its stated terms and the remainder of which had not), the Company issued to such private investors a total of 1,418,615 shares of Company Series RX-1 Preferred Stock of which $1,791,000 was recorded in additional paid-in capital as this debt restructuring was for related parties and approximately $35,000 was recorded as a gain on settlement for a non-related party. The following table summarizes the Series RX-1 Preferred Stock Transactions:

The Company used the Option Pricing Method to determine the fair value of the issued and outstanding shares of RX-1 Preferred Stock as this series of preferred stock has a liquidation preference over the Company’s other classes of stock. Based on the calculations within the Option Pricing Method, the fair value of the outstanding 1,418,615 shares of RX-1 Preferred Stock is $674,103. Of those individuals who were issued shares of the Company’s RX-1 Preferred Stock, all were deemed related parties except for one individual. For the related party individuals, the difference between the fair value of the RX-1 Preferred Stock and the aggregate principal and interest of the debt liabilities then owed totaling $1,789,836 was recognized as additional paid in capital. For the non-related party individual, the difference between the fair value of the RX-1 Preferred Stock and the aggregate principal and interest of the debt liability then owed was recognized as a gain. As a result, the Company recognized a gain on debt settlement of $34,925 on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019. See Note 8.

PREFERRED STOCK WARRANTS

Series RX-2 Warrants

In June 2019, pursuant to certain securities exchange agreements and securities purchase agreements between the Company and certain of its directors and current and former employees, and in exchange for an aggregate $490,658 in debt owed to such parties, inclusive of accrued interest, (a portion of which debt had been convertible into Company common stock in accordance with its stated terms and the remainder of which had not), the Company issued to such individuals warrants to purchase a total of 981,316 shares of Company Series RX-2 Preferred Stock at a price per share of $0.50 (collectively, the “Series RX-2 Warrants”). The Series RX-2 Warrants are exercisable at any time prior to the earlier of (i) the effectiveness of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company, or other similar occurrence involving the Company, or (ii) December 31, 2021. If all Series RX-2 warrants are exercised to purchase a total of 981,316 shares of Series RX-2 Preferred Stock at $0.50 per share, the amount of cash realizable by the Company is $490,658. The following table summarizes the transactions for the Series RX-2 Warrants:

The Company used the Black Scholes Method to determine the fair value of the outstanding Series RX-2 Warrants as the underlying preferred stock does not grant its holders any additional economic value over common stock holders, there is no liquidation preference and no one holder would control the Company upon exercise. Based on the calculations within the Black Scholes Method, the fair value of the outstanding Series RX-2 Warrants to purchase a total of 981,316 shares of RX-2 Preferred Stock is $308,133. All individuals who were issued Series RX-2 Warrants were deemed related parties and all amounts then owned, aggregate of principal and interest, were for services performed on behalf of the Company and those services were previously recognized as an expense (such as directors fees or contractor fees) to the Company. As a result, the Company recognized a gain on restructuring of service-related obligations of $182,523 (part of total $1,580,167) on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019. See Note 9.

Series RX-3 Warrants

In June 2019, pursuant to certain securities exchange agreements and securities purchase agreements between the Company and certain of its outside professional consultants and employees, and in exchange for an aggregate $1,397,647 in debt owed to such parties, inclusive of accrued interest, (a portion of which debt had at one point in time been convertible into Company common stock in accordance with its stated terms and the remainder of which had not), the Company issued to such individuals warrants to purchase a total of 481,212 shares of Company Series RX-3 Preferred Stock at a price per share of $5.00 (collectively, the “Series RX-3 Warrants”). Except in the event that certain intervening corporate events trigger acceleration, the rights of the recipients of Series RX-3 Warrants shall only vest and become exercisable as follows:

Once vested pursuant to the foregoing schedule, the Series RX-3 Warrants are exercisable in accordance with their terms at any time prior to the earlier of (i) the effectiveness of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company, or other similar occurrence involving the Company, or (ii) December 31, 2029. If all Series RX-3 warrants are exercised to purchase a total of 481,212 shares of Series RX-3 Preferred Stock at $5.00 per share, the amount of cash realizable by the Company is $2,406,060. The following table summarizes the transactions for the Series RX-3 Warrants:

The Company used the Black Scholes Method to determine the fair value of the outstanding Series RX-3 Warrants as the underlying preferred stock does not grant its holders any additional economic value over common stock holders, there is no liquidation preference and no one holder would control the Company upon exercise. Based on the calculations within the Black Scholes Method, the fair value of the outstanding Series RX-3 Warrants to purchase a total of 481,212 shares of RX-3 Preferred Stock is $1,737,175. All individuals who were issued Series RX-3 Warrants were deemed related parties and all amounts then owned, aggregate of principal and interest, were for services performed on behalf of the Company and those services were previously recognized as an expense (such as salaries and wages or contractor fees) to the Company. Although the initial fair value of the RX-3 Warrants is greater than the amounts then owed, and because the RX-3 Warrants carry milestones as described above to be met before any of the warrants shall vest and become exercisable, no expense is to be recognized until if and when the vesting of the RX-3 Warrants becomes probable. No vesting has occurred as of September 30, 2019 and it is not probable as of the date. As a result, the Company recognized a gain on restructuring of service-related obligations of $1,397,644 (part of total $1,580,167) on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019. See Note 9.

For the nine months ended September 30, 2019, no Series RX-2 Warrants nor Series RX-3 Warrants were exercised.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

The Company is subject to legal proceedings and claims that may arise in the ordinary course of business. In the opinion of management, the amount of potential liability the Company is likely to be found liable for otherwise incur as a result of these actions is not so much as would materially affect the Company’s financial condition.

In July, 2014, the Company entered into an employment agreement with the Company’s president and chief executive officer. The agreement provides for a base annual salary of $162,500, a term of three (3) years, and contains a provision for an incentive-based cash bonus equal to one and one half percent (1.5%) of free cash flow (as calculated pursuant to a stated formula) up to a maximum of $500,000 for any single fiscal year. As of September 30, 2019 and December 31, 2018, no amounts for bonuses had been earned or accrued under this provision. In addition to the bonus provision and the annual base salary, the employment agreement provides for payment of previously accrued base salary in the amount of $0 and vested deferred vacation compensation in the amount of $12,500 as of September 30, 2019 and are included in accrued payroll. The agreement further provides for severance compensation equal to the then base salary until the expiration of the term of the agreement. There is no severance compensation in the event of voluntary termination or termination for cause. In May 2017, the Company’s board of director’s, including the compensation committee thereof, reviewed the employment agreement for Mr. Malone and extended the term thereof, otherwise due to expire on July 23, 2017, through July 23, 2020.

The Company occupies an office building for its corporate headquarters located in Lake Park, Florida. In January 2015, the Company renewed a short-term lease agreement with a shareholder for this 8,560 square foot facility under a five year lease agreement ending December 31, 2019 with an option to renew for one successive term of five years at the then current occupancy rates. The monthly rent, including sales and use taxes, is $7,429. In accordance with the terms of the leasehold agreement, the Company is responsible for all utilities, repairs and maintenance.

Total rent expense for the nine months ended September 30, 2019 and 2018 for this facility, before adjustments of reclassified facilities cost for research and development, totaled $64,915 and $63,115, respectively.

NOTE 12 – RELATED PARTY TRANSACTIONS

The Company’s executive officers and employees, from time to time, make payments for materials and various expense items (including business related travel) in the ordinary course of business via their personal credit cards in lieu of checks drawn on Company accounts. The Company does not provide its employees or executive officers with corporate credit cards. Amounts due these officers and directors (including one of the Company’s directors, the president and chief executive officer, and the controller) are included in accounts payable, related parties, on the Condensed Consolidated Balance Sheets.

As of September 30, 2019, one of the Company’s directors held five, separate convertible notes issued by the Company. These convertible notes reflected a portion of the aggregate amount that such outside director is owed by the Company for a combination of (i) certain vendor payments made by him on the Company’s behalf, (ii) cash previously advanced to the Company for working capital, and (iii) director’s fees earned through June 30, 2017. One of these notes, in the face amount of $60,000, was issued to a company controlled by the director, was due on demand, together with accrued interest at 4.5% APR, and was convertible at $0.01 per share of common stock. Another of these notes, issued to the director personally, was in the face amount of $30,000, was similarly due on demand, together with accrued interest at 4.5% APR, and was convertible at $0.01 per share of common stock. The third of these notes, also issued to the director personally, was in the face amount of $55,500, was due on demand, together with accrued interest at 4.5% and was convertible at $0.007 per share of common stock. The fourth note, issued in the name of the director’s son, was in the face amount of $20,000, was due on demand, together with accrued interest at 4.5% and was convertible at $0.005 per share of common stock. The fifth note, issued to the director personally, was in the face amount of $28,500, was similarly due on demand, together with accrued interest at 4.5% APR, and was convertible at $0.015 per share of common stock. In June 2019, in exchange for the five separate convertible notes mentioned above, the Company issued a total of 118,114 shares of the Company’s Series RX-1 preferred stock in exchange for a cumulative $110,000 of debt owed, inclusive of accrued interest (total $132,653) and a warrant for a total of 187,395 shares of the Company’s Series RX-2 preferred stock total in exchange for a cumulative $84,000 of debt owed, inclusive of accrued interest (total $93,698). In addition, the Company issued a warrant for a total of 110,647 shares of the Company’s Series RX-2 preferred stock in exchange for previously accrued director’s fees earned through December 31, 2018 in the amount of $54,000, inclusive of accrued interest (total $55,323). See Note 10.

As of September 30, 2019, the Company’s general counsel held five notes issued by the Company. One such note reflected an amount due for legal services provided for the year ended December 31, 2014 in the amount of $150,000. This note was payable by the Company on demand, together with accrued interest at 4.5% APR. Another of these notes reflected an amount due for legal services provided for the year ended December 31, 2015 in the amount of $120,000. This note was similarly payable on demand, together with accrued interest at 4.5% APR. A third note was in the amount of $10,000, reflects funds advanced to the Company for working capital, was due on demand, together with accrued interest at 12% APR. The fourth note of $7,000 reflected funds advanced to the Company for working capital on the basis of a 15-day repayment obligation. The final note in the amount of $15,752, reflected funds advanced to Advanced Cement Sciences LLC for working capital. No terms were set for this fifth note. On December 24, 2018, and in connection with the Company’s acquisition of Advanced Cement Sciences LLC, the Company’s general counsel agreed to relinquish the previous respective rights of conversion on the first three notes mentioned above. In June 2019, in exchange for the five separate notes mentioned above, the Company issued a total of 33,873 shares of the Company’s Series RX-1 preferred stock in exchange for a cumulative $32,752 of debt owed, inclusive of accrued interest (total $37,251) and a warrant for a total of 110,416 shares of the Company’s Series RX-3 preferred stock in exchange for a cumulative of $270,000 of debt owed (total $324,856). In addition, the Company issued a warrant for a total of 77,257 shares of the Company’s Series RX-3 preferred stock total in exchange for previously accrued contractor fees earned through December 31, 2018 in the amount of $221,875, inclusive of accrued interest (total $227,300). See Note 10.

As of September 30, 2019, the Company had issued a total of seven (7) convertible notes to a certain related party investor and significant shareholder. The first such note was in the amount of $100,000, was due on November 13, 2018, together with accrued interest at 10% APR, and was convertible at $0.01 per share of common stock. The second such note was also in the amount of $100,000, was due on March 18, 2019, together with accrued interest at 10% APR, and was convertible at $0.01 per share of common stock. The third such note was in the amount of $50,000, was due on May 12, 2019, together with accrued interest at 10% APR, and was convertible at $0.01 per share of common stock. The fourth such note was in the amount of $200,000, was due on June 7, 2019, together with accrued interest at 10% APR, and was convertible at $0.01 per share of common stock. The fifth such note was in the amount of $300,000, was due on July 28, 2019, together with accrued interest at 10% APR, and was convertible at $0.01 per share of common stock. The sixth such note was in the amount of $50,000, was due on demand, together with interest at 10% APR, and was convertible at $0.01 per share of common stock. And the seventh such note was in the amount of $50,000, was due on June 15, 2018, together with interest at 10% APR, and was convertible at $0.01 per share of common stock. In June 2019, the Company issued a total of 874,964 shares of the Company’s Series RX-1 preferred stock in exchange for the cumulative $850,000 of debt owed, inclusive of accrued interest (total $1,140,015). See Note 10.

As of September 30, 2019, one of the Company’s directors previously held two convertible notes issued by the Company. The first note, issued to the director personally for director’s fees earned through September 15, 2016, was in the face amount of $20,500, due on demand, together with accrued interest at 4.5% APR, and was convertible at $0.007 per share of common stock. The second note, issued to the director for director’s fees earned through June 30, 2017, was in the face amount of $9,500, was similarly due on demand, together with accrued interest at 4.5% APR, and was convertible at $0.015 per share of common stock. In June 2019, the Company issued a warrant for a total of 66,966 shares of the Company’s Series RX-2 preferred stock in exchange for $30,000 of debt owed, inclusive of accrued interest (total $33,483). In addition, the Company issued a warrant for a total of 36,882 shares of the Company’s Series RX-2 preferred stock in exchange for previously accrued director’s fees earned through December 31, 2018 in the amount of $18,000, inclusive of accrued interest (total $18,441). See Note 10.

The Company accrued payroll earned, by related parties, during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively, in the total amount of $0 and $182,396 for the Company’s president and chief executive officer and controller.

As of September 30, 2019, the Company’s president and chief executive officer previously held two notes issued by the Company. The first note represented previously accrued base salary earned through September 15, 2016 in the amount of $349,329, was due on demand, together with accrued interest at 4.5% APR. The second note represented previously accrued base salary earned through June 30, 2017 in the amount of $87,532, was due on demand, together with accrued interest at 4.5% APR. On December 24, 2018, and in connection with the Company’s acquisition of Advanced Cement Sciences LLC, the Company’s president and chief executive officer agreed to relinquish the previous respective rights of conversion on these two notes. In June 2019, the Company issued a warrant for a total of 170,009 shares of the Company’s Series RX-3 preferred stock in exchange for the $436,861 of debt owed for the two notes, inclusive of accrued interest (total $489,566). In addition, the Company issued a warrant for a total of 41,724 shares of the Company’s Series RX-3 preferred stock in exchange for previously accrued base salary earned through December 31, 2018 in the amount of $117,327, inclusive of accrued interest (total $120,150). See Note 10.

As of September 30, 2019, the Company’s controller previously held two notes issued by the Company. The first note represented previously accrued base salary earned through September 15, 2016 in the amount of $134,604, was due on demand, together with accrued interest at 4.5% APR. The second note represented previously accrued base salary earned through June 30, 2017 in the amount of $28,010, was due on demand, together with accrued interest at 4.5% APR. On December 24, 2018, and in connection with the Company’s acquisition of Advanced Cement Sciences LLC, the Company’s controller agreed to relinquish the previous respective rights of conversion on these two notes. In June 2019, the Company issued a warrant for a total of 63,291 shares of the Company’s Series RX-3 preferred stock in exchange for the $162,614 of debt owed for the two notes, inclusive of accrued interest (total $182,413). In addition, the Company issued a warrant for a total of 18,515 shares of the Company’s Series RX-3 preferred stock in exchange for previously accrued base salary earned through December 31, 2018 in the amount of $52,108, inclusive of accrued interest (total $53,362). See Note 10.

As of September 30, 2019, an independent contractor who had been the president of one of EcoSmart’s divisions prior to the merger with the Company, who is also shareholder of the Company, previously held one convertible note representing accrued earnings in the amount of $25,700. In June 2019, the Company issued the holder of the note a warrant for a total of 58,006 shares of the Company’s Series RX-2 preferred stock in exchange for $25,700 of debt owed, inclusive of accrued interest (total $29,003). See Note 10.

During the nine months ended September 30, 2019 and 2018, the Company recorded revenue for sales to related parties (also minority shareholders) in the amount of $29,920 and $59,7693, respectively. For the nine months ended September 30, 2019, one related party accounted for approximately 3% of Company revenue, a second related party accounted for approximately 2%, and, as a group, the sales to related parties accounted for approximately 5% of Company revenues. These revenues are recorded as revenue, related party on the Company’s Condensed Consolidated Statements of Operations.

NOTE 13 – DISCONTINUED OPERATIONS

As of September 30, 2019 and December 31, 2018, the Company has presented $114,368 of Accrued royalties in discontinued operations. The royalties pertain to the Company’s sale of the QuickVerse^® product line in 2011. See Note 1.

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

Cautionary Statement Regarding Forward-Looking Statements

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Findex.com, Inc. (“we”, “us”, “our” or the “Company”) to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance the forward-looking statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.

This information should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of Part I of this quarterly report, and our audited financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operation contained in our annual report on Form 10-K for the fiscal year ended December 31, 2018.

Description of Business

Findex.com, Inc. is headquartered in Lake Park, Florida with its base of business operations co-located in the same facility. The Company is currently comprised of two operating companies, RexPro Sealers and Coatings (“RexPro”), a Florida corporation (formerly EcoSmart Surface & Coating Technologies, Inc.), and Advanced Cement Sciences, LLC, a Florida limited liability company (“ACS”). RexPro has historically been the driver of both operating overhead and revenue. It was acquired by us in a merger in 2014 and centers around a proprietary line of specialty surface coatings that have a broad range of value-adding industrial, commercial, residential and consumer applications. A recent material development in the RexPro business plan is an extension, currently underway but only in the earliest of stages, to vertically integrate its interior flooring and exterior hardscape coatings products business with a service business focused on the applications of those products. ACS is a Florida-based, engineered cement technology and products firm founded in mid-2016 and currently focused on developing and commercializing a line of proprietary admixtures to be used in the production of ultra-lightweight, high-strength concrete and high-performance stucco. Despite its lack of material revenue to date, ACS is a venture that our management had been very actively involved in developing since 2016 and into which we have invested significantly, but that, due to a lack of available company financial resources coupled with ACS’s lack of near-term prospects for generating material revenue, has been the subject in recent months of considerably reduced allocations of our available capital and human resources, a trend we expect to continue unless and until our financial condition substantially improves.

REXPRO ADVANCED COATINGS

Our RexPro advanced coatings division, currently our core business and expected to remain so for the indefinite future, centers around a portfolio of cutting-edge chemistry technologies that we acquired in 2014 as part of the merger with EcoSmart and have since further developed. The formulations and related trade secrets comprising these base coating technologies have restorative and protective value-adding application across a wide variety of industries and products. Among others, these include the following:

Having taken control in 2014 of the variety of thematic coating chemistries and related business opportunities discussed above, management was faced with the challenge of sorting through them and making determinations as to which the company would pursue itself, when and how to go about the process for those it determined to pursue itself, which made sense for the company to off-load to licensee or distribution partners, or to simply convey outright through assignment but potentially manufacture for the assignee, and how in each case to make the most of, and from, these various arrangements.

Largely to the exclusion of many of the other opportunities we have to potentially pursue, and owing to a variety of strategic determinations that have been made by us in recent months coupled with a substantial revision to our business plan, our RexPro interior flooring and exterior tile, paver and hardscape line of coatings products is our current focal point in terms of business development, including our own, direct marketing and sales. Further, we have determined to extend our coatings business in this market to not only include product manufacturing and distribution, but also, in a meaningful departure from our historical operations, to vertically integrate by expanding into the applications services side of the business. These strategic determinations and the resultant material change in our going-forward business plan were arrived at on the basis of observations made, data accumulated, and related conclusions reached, in each case by management over the past several years.

Although we believe that we are adequately prepared to experience success if and when we complete a required, substantial and near-term financing, especially given our control over our proprietary products, our decision to vertically integrate by entering the applications services aspect of the flooring and hardscape coatings industry represents a major shift in our business, and one in relation to which we have no direct experience and only limited indirect experience, and we must for this reason be viewed properly as a start-up venture in this aspect of our business, which we are depending on becoming a major aspect.

Management Overview

In addition to planning a major rebranding initiative of our coatings business, which is now underway, a key focus of management during the nine months ended September 30, 2019 centered on our continuing pursuit of relationships with potentially key strategic business development partners and potential distributors and/or resellers of our RexPro products. To varying degrees, these relationships were pursued in order to establish, further develop, and/or expand our coatings market share within our most highly targeted verticals, including interior flooring and exterior tile, paver and hardscape products (inclusive of vinyl composition tile flooring [“VCT”]), heavy trucks and construction equipment, boats and other marine vessels, automobiles and motorcycles, and industrial and residential HVAC units. Throughout the nine months ended September 30, 2019, management was, as it has continued to be and expects for the foreseeable future to be, committed to securing and solidifying foundational relationships within each of these markets.

During the first half of the nine months ended September 30, 2019, and, with an interest in raising immediate cash while simultaneously seizing on an opportunity to free up management to focus our scarce financial and human resources on other vertical market opportunities, management continued discussions with a third-party consumer marketing group regarding the possibility of assigning all of our then-existing proprietary (patent) rights to our automobile and motorcycle coatings products, which features restorative properties for the exteriors of these vehicles, as well as a unique ability to preserve and protect those surfaces. In February 2019, and following extensive negotiations, a transaction was consummated with this group in which we received immediate, non-recurring gain on intangible assets of $150,000. Although there can be no assurance, it is management’s current expectation that the group to which we assigned this formula intends to begin private-labeling the product commencing sometime during the latter half of 2019 or first quarter of 2020, and that we will likely benefit thereafter for an indeterminate period from ongoing, fixed-price recurring revenue at what we believe will constitute reasonably acceptable gross profit margin levels based on our continued contract manufacturing of it for them.

For the nine months ended September 30, 2019, and after making a variety of strategic determinations during the year ended December 31, 2018, management continued to develop a substantial revision to our going-forward business plan pursuant to which our RexPro interior flooring and exterior tile, paver and hardscape line of coatings products will be the focal point of our resource allocation and operations moving forward. As further detailed in the Business Section of our Annual Report on Form 10-K filed on April 16, 2019, our determination to focus on this line encompasses not only our product manufacturing and distribution operations, but also very pointed initiatives in the direction of building a thriving applications services contracting business, RexPro Services, to both complement and support our product sales as well as stand alone as a major, independently productive part of our business and organization. This strategic determination to vertically integrate a select aspect of our existing business, and the resultant material change in our going-forward business plan, were arrived at on the basis of extensive observations made, data accumulated, market insights developed, and related conclusions reached, in each case by management over the past several years. Although there can be no assurance, we believe that our recent shift in business direction, when coupled with our very strong, proprietary products, positions us very favorably to realize rapid growth and achievement of internally-established financial objectives, both near-and long-term.

In August 2019, the Company entered into an intellectual property sale and assignment agreement with our HVAC distributor in exchange for a one-time cash payment of $200,000. Under the terms of the agreement, the now exclusive worldwide HVAC marketer and distributor of what had up until then been our proprietary product now owns the intellectual property associated with our formerly proprietary HVAC coating product branded and known as “Infiniguard” (a.k.a. “Infinigard”). The agreement includes a provision establishing a transitional manufacturing period of no less than six months during which the Company will continue to manufacture the Infiniguard HVAC coating product for the exclusive worldwide HVAC marketer and distributor at a predetermined, fixed-price per gallon. This agreement supersedes all prior agreements entered into during the year ended December 31, 2018 with the HVAC marketer and distributor under which specified distribution rights within certain designated territories were established. During the nine months ended September 30, 2019, the HVAC marketer and distributor, along with management, invested considerably in pursuing product development and commercialization initiatives aimed at the industrial and residential HVAC equipment coatings products. The Infiniguard coating product serves as a layer of protection from corrosion, including in salt water, acid, alkaline, chemical and similarly harsh environments, and from clogging impairments occasioned by airborne mold, pollen, dust, and soot particulates. Substantial testing in this area by independent groups has been conducted and shown that, over time, a significant correlation can be identified between the natural oxidation and restricted airflow resulting from dirt build-up on the condenser coils of HVAC units, on the one hand, and performance efficiency loss factor on the units, on the other, especially those operating in relatively humid or otherwise harsh climates. In addition to protection from basic operational malfunction, the Infiniguard HVAC coating product enables unit owners to enjoy reduced maintenance requirements as well as increased energy efficiency via a reduction in net kilowatt hours, which translates to a reduction in energy consumption costs of up to 15% over the life of a subject condensing unit. For the nine months ended September 30, 2019, the Company recognized revenue in the amount of $387,056 from such sale of intellectual property and prior distribution rights. In addition, for the nine months ended September 30, 2019, the Company realized an additional $45,000 in revenue from the HVAC marketer and distributor for sales of the Infiniguard HVAC coating product that we continue to manufacture for them on a fixed-price, recurring basis with what we deem to be reasonably acceptable gross profit margins, as well as a pre-payment of approximately $3,000 for the Infiniguard HVAC coating product that will likely be shipped and recognized as revenue during the fourth quarter of 2019.

Regarding ACS, a major shift in our plans occurred during the year ended December 31, 2018 and continued for the nine months ended September 30, 2019. On December 24, 2018, in large part in order to preserve the opportunity afforded by ACS despite our recent determination to continue to restrict further investment in it for the time being, we acquired from the other holders of equity interests in ACS the 68.95% economic interests not previously owned by us, resulting in our owning 100% of this asset. As has been repeatedly disclosed by us in previous filings, since September of 2016, and until recently, we had been allocating increasing amounts of our financial and human resources to the development of ACS’s business and its line of proprietary admixtures for ultra-lightweight, high strength concrete and high-performance stucco products. Previous resource allocations for ACS centered primarily around technology development and testing, manufacturing, and related systems. While several accomplishments were achieved, due to an increasing unavailability of company financial resources and resultant pressures in meeting obligations, management, forced with difficult decisions regarding alternative options for the allocation of scarce capital, determined to substantially reduce further investment for the foreseeable future in ACS, a trend we expect to continue unless and until our financial condition substantially improves. Although there can be no assurance, and subject to a variety of as yet unresolved issues and challenges, we do continue to believe that the ACS technology and products represent a potentially very promising future business opportunity for us. To date, however, ACS has yet to achieve any meaningful degree of sales traction for any of its product lines and, to date, sales have been very limited and deliberately targeted towards customers that view their use of the product as part of a series of final-stage, semi-pilot projects. Despite meaningful efforts towards enabling ACS’s ability to readily provide evidence of product compliance with existing building codes and related industrial standards within identified markets, moreover, and towards its ability to readily demonstrate product workability and efficacy through showcase projects, positive customer experiences, and industry expert references and endorsements within such markets, many of these and related targeted objectives have yet to have been achieved and much remains to be done in terms of ACS’s product commercialization broadly.

Finally, during the nine months ended September 30, 2019, and company-wide, management remained focused on three primary areas identified as keys to our near-term viability, growth and prosperity. One such area was revenue generation, as effected through the formalization of various distribution and licensing relationships that we had been pursuing over time along with new product introductions. A second area was the maximization of cash flow and return on existing assets, as effected through the refinement of internal production operations and throughput efficiencies. A third area was corporate finance, and specifically the raising of capital necessary to bridge shortfalls in available cash, for both operational and capital investment purposes, through to the point, which unfortunately was never reached, at which working capital and cash reserve levels would have been sufficient to be self-sustaining, and which was accomplished during the nine months ended September 30, 2019 and the year ended December 31, 2018 almost exclusively through the sales of various assets or exclusive distribution rights involving assets.

Additionally in terms of corporate finance, in June 2019, the Company entered into a series of related Securities Exchange Agreements and Securities Purchase Agreements with then Company debtholders by which management effectively restructured what had been an aggregate of $3,714,485 in outstanding debt on the Company’s balance sheet and leaving in its stead only a combination of a newly authorized series of convertible preferred stock and warrants to acquire two separate but also recently authorized series’ of convertible preferred stock. As further detailed in the Company’s Current Report on Form 8-K filed on June 12, 2019, these transactions represented a deliberate and carefully planned initiative by the Company’s management aimed at significantly increasing the strength of our balance sheet by eliminating 82% of our previously existing debt and relief from the resulting and mounting financial vulnerability and stress to which the Company had become increasingly exposed in recent years.

Results of Operations for Quarters Ending September 30, 2019 and September 30, 2018

The following tables summarize our results of operations for the three and nine months ended September 30, 2019, as well as for the comparative period ended September 30, 2018.

Elaborated on to varying degrees below, the differing results of operations year-over-year are primarily attributable to the following for the three and nine months ended September 30, 2019:

Although there can be no assurance, in future periods, and assuming adequate capitalization through outside financing, we anticipate an increase in overall Company revenues as well as an increase in overall sales, marketing and general and administrative expenses due to our anticipated growth and expansion in our RexPro interior flooring and exterior tile, paver and hardscape line of coating products and our planned foray into the related contract applications of those products.

Revenues

The following is certain detail from and built into the revenue related line items of our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2019, as well as for the comparative period ended September 30, 2018.

The differing results of our net revenues are primarily attributable to the following for the three and nine months ended September 30, 2019:

By vertical market, our revenues during the nine months ended September 30, 2019 and 2018 broke out as follows:

The differing results of our net revenues by vertical market are primarily attributable to the following for the nine months ended September 30, 2019:

For the nine months ended September 30, 2019, one shareholder/related party, who specializes in applying our interior flooring and exterior tile, paver and hardscape coatings, accounted for approximately 3% of our revenue, and a second shareholder/related party, who also specializes in applying our interior flooring and exterior tile, paver and hardscape coatings, accounted for 2% of our revenue. As a group, the sales to shareholders/related parties accounted for approximately 5% of our revenues with a majority of the revenues derived from our interior flooring and exterior tile, paver and hardscape coatings. During 2018, we entered into an exclusive North American and Caribbean distribution rights agreement for the HVAC and refrigeration vertical markets for our coatings with a third-party applicator group from which we received immediate non-recurring, amortized (non-realized) revenue of $190,000. We determined that the associated revenue would be recognized over the period of thirty years as the agreements for the sale of the distribution rights also called for us to continue to produce and manufacture the product for our HVAC distributor over the term of the agreement. However, as disclosed elsewhere in this quarterly report on Form 10-Q, in August 2019, we entered into an intellectual property sale and assignment agreement with our HVAC distributor in exchange for a one-time cash payment of $200,000. Under the terms of the agreement, the now exclusive worldwide HVAC marketer and distributor of what had been our proprietary product now owns the intellectual property associated with our formerly proprietary HVAC coating product branded and known as “Infiniguard” (a.k.a. “Infinigard”). The agreement includes a provision establishing a transitional manufacturing period of no less than six months during which we will continue to manufacture the Infiniguard HVAC coating product for the exclusive worldwide HVAC marketer and distributor at a predetermined, fixed-price per gallon. This agreement supersedes all prior agreements entered into during the year ended December 31, 2018 with the HVAC marketer and distributor under which specified distribution rights within certain designated territories were established. For the nine months ended September 30, 2019 and 2018, we recognized contract liability in the amount of $0 and $188,639, respectively and revenue in the amount of $387,056 and $1,361, respectively from such sales of distribution rights and intellectual property.

Although there can be no assurance, we anticipate an increase in overall Company revenues in future periods as the focal point of the Company in terms of business development will be increasingly centered around our RexPro interior flooring and exterior tile, paver and hardscape coatings applications services and products, and, likely to a lesser degree, the continued and expanded growth of our heavy truck and construction equipment coatings.

Although there can be no assurance of either mix or volume, and based on our revised business plan, we expect going forward to derive recurring revenue from each of the following:

Management believes that, going forward, our future revenues will be driven largely by and dependent upon the following key factors:

Cost of Sales

The following is certain detail from and built into the cost of sales related line items of our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2019, as well as for the comparative period ended September 30, 2018.

Cost of sales consists primarily of direct costs, royalties accrued to providers of intellectual property, and the costs associated with reproducing, packaging, and shipping our products. The significant decrease in cost of sales as a percentage of net revenues for the three and nine months ended September 30, 2019 is directly attributable to the increase in revenue resulting from the intellectual property sale and assignment agreement with the now exclusive worldwide HVAC marketer and distributor for our HVAC coating product in August 2019, which such agreement superseded all prior sales of distribution rights agreements entered into during June and August 2018 with our HVAC distributor resulting in the immediate recognition of any remaining contract liability associated with those distribution right agreements.

The differing gross margins by our vertical markets are shown below:

In August 2019, the Company entered into an intellectual property sale and assignment agreement with our HVAC distributor in exchange for a one-time cash payment of $200,000. Under the terms of the agreement, the now exclusive worldwide HVAC marketer and distributor of what had up until then been our proprietary product now owns the intellectual property associated with our formerly proprietary HVAC coating product branded and known as “Infiniguard” (a.k.a. “Infinigard”). The agreement includes a provision establishing a transitional manufacturing period of no less than six months during which the Company will continue to manufacture the Infiniguard HVAC coating product for the exclusive worldwide HVAC marketer and distributor at a predetermined, fixed-price per gallon. This agreement supersedes all prior agreements entered into during the year ended December 31, 2018 with the HVAC marketer and distributor under which specified distribution rights within certain designated territories were established.

The high gross margins in our interior flooring and exterior tile, paver and hardscape coatings was a key point when management determined to shift to our new long-term strategic plans to vertically integrate into the applications services market. The amount of physical product used in periodic maintenance process is a relatively minor component in the overall cost of applications services and the overwhelming volume of gross revenue in this industry goes to those performing the applications of such products. As illustrated above, we have extremely high gross margins in all areas except for the HVAC and related equipment coatings market. This is a direct result of the intellectual property sale and assignment agreement that we entered into in August 2019 with what had up until then been our exclusive worldwide HVAC coatings marketer and distributor. Under the terms of the agreement, we will continue to produce and manufacture the product for the HVAC marketer and distributor for a transitional period of a minimum of six months at a predetermined, fixed-price per gallon of product. For the nine months ended September 30, 2019, we experienced a decrease in the gross margins for our HVAC vertical market of 5.65% from 41.70% for the year ended December 31, 2018 to 36.05% for the nine months ended September 30, 2019. This decrease is again a result of the August 2019 intellectual property sale and assignment agreement with the HVAC marketer and distributor as a new manufacturing fixed-price per gallon was established. In contrast, we have experienced an increase in gross margins in all areas except for HVAC, and although there can be no assurance, management believes this can be maintained as it has put into place several safeguards for price fluctuations for our raw materials.

Into the near future, we anticipate that our direct costs are likely to increase in real dollar terms based on escalating sales volume coupled with the likelihood of an inability to make material purchases in bulk at meaningfully discounted rates due to cash restraints. Though there can be no assurance that our cash position and financial condition will improve over time, if it does, we intend to take advantage of bulk purchasing opportunities at discounted rates. More generally, we anticipate that our cost of sales will increase in the future in direct proportion to increases in top line growth, but that our gross margins will remain very strong.

Management believes that, going forward, our gross profit margins will be driven largely by and dependent upon the following key factors:

Sales, General and Administrative

The following is certain detail from and built into the SG&A related line items of our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2019, as well as for the comparative period ended September 30, 2018.

Our research and development costs consist of direct production costs, including labor directly associated with the development of projects and outside consultants, and indirect costs, such as those associated with facilities leasing and related overhead. For labor costs and costs of outside consultants, we record the research and development costs as a reduction against either personnel costs or contract services. For facilities leasing related expenses, we record the research and development costs as a reduction against rent. For the three and nine months ended September 30, 2019, we reclassified to research and development approximately $3,000 and $10,000, respectively, from total personnel costs and approximately $3,000 and $8,000, respectively, from rent. Comparatively, for the three and nine months ended September 30, 2018, we reclassified to research and development approximately $10,000 and $57,000, respectively, from total personnel costs and approximately $7,000 and $18,000, respectively, from rent.

The differing results of total sales, marketing, general and administrative costs are primarily attributable to the following for the nine months ended September 30, 2019:

For the immediate future, and although there can be no assurance, we would anticipate that our sales, marketing, general and administrative costs will increase in the future in direct proportion to top line growth with our current focus being on our RexPro interior flooring and exterior tile, paver and hardscape coatings and the addition of the applications service side of this vertical market.

Management believes that, going forward, our future costs structure will be driven largely by and dependent upon the following key factors:

Gain on Intangible Asset

In February 2019, we sold, for $150,000 in cash to an unaffiliated private company, a patent then owned by the Company, together with certain related and proprietary trade secret information, the subject of which is a process for producing a certain coating product usable on automobiles and motorcycles, among other potential surfaces . We did not have a value assigned to the intangible assets consisting of the patent and proprietary trade secret information, and as a result, we recognized a gain on intangible asset of $150,000 on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.

Gain on Debt Settlement

In June 2019, the Company finalized a broad-based debt restructuring initiative with our then debtholders. One such debtholder, who was not a shareholder; and therefore, who did not constitute a related party, agreed to settle such note in exchange for the Company’s Series RX-1 preferred stock. This transaction triggered the recognition of a gain by us on debt settlement in the amount of $34,925 on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.

Gain on Derivative-Based Restructuring of Service-Related Obligations

In June 2019, pursuant to certain securities exchange agreements and securities purchase agreements between the Company and certain of our directors and current and former employees, and in exchange for an aggregate $490,658 in debt owed to such parties as of such dates, inclusive of accrued interest, (a portion of which debt had been convertible into Company common stock in accordance with its stated terms and the remainder of which had not), the Company issued to such individuals warrants to purchase a total of 981,316 shares of Company Series RX-2 preferred stock at a price per share of $0.50. Also in June 2019, pursuant to certain securities exchange agreements and securities purchase agreements between the Company and certain of our outside professional consultants and employees, and in exchange for an aggregate $1,397,647 in debt owed to such parties as of such dates, inclusive of accrued interest, (a portion of which debt had at one point in time been convertible into Company common stock in accordance with its stated terms and the remainder of which had not), the Company issued to such individuals warrants to purchase a total of 481,212 shares of Company Series RX-3 preferred stock at a price per share of $5.00. In connection with this serial restructuring of service-related obligations taken as a whole, and based on the relevant accounting guidance, we recognized a gain on restructuring of service-related obligations of $1,580,167 on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.

Income Taxes

As of September 30, 2019 and December 31, 2018, based on uncertainty about the timing of and ability to generate future taxable income and our assessment that the realization of the deferred tax assets no longer met the “more likely than not” accounting criterion for realization, we provided for a full valuation allowance against our net deferred tax assets. If we determine at some point that it is more likely than not that we will be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset valuation allowance would be recorded in the period when such determination is made.

Liquidity And Capital Resources

Our primary needs for liquidity and capital resources are the working capital requirements of our continued operations, which includes raw materials procurement, production personnel, service applications personnel, the ongoing internal development of new products and expansion and upgrade of existing products, marketing and sales, and executive salaries and insurance benefit obligations. Cash generated through our current operations may not prove sufficient to sustain such operations, and our pursuit of an aggressive growth plan, as currently exists, will likely require funding from outside sources. (See Note 2 – Going Concern.) Funding from outside sources may include but is not limited to the pursuit of other financing options such as commercial loans or public or private sales of securities, including common stock, preferred stock and/or convertible notes or debentures. The Company’s cash on hand as of September 30, 2019 was insufficient to support our operations for the next twelve months.

Liquidity for our day-to-day continuing operations remains a very serious ongoing concern for us, and there can be no assurance of it remaining manageable.

Net cash used in operating activities for the nine months ended September 30, 2019 and 2018, consisted mainly of payments for personnel, inventory purchases, vendor payments and other operating expenses.

Net cash provided in investing activities for the nine months ended September 30, 2019, resulted from the sale of a patent then owned by the Company for $150,000 in cash to an unaffiliated private company.

For the nine months ended September 30, 2019, we did not have proceeds by financing activities. Comparatively, for the nine months ended September 30, 2018, cash provided by financing activities was mainly the result of proceeds from the sale of common stock as well as proceeds from the sale of note payables to related parties.

Financing

Given practical considerations, we believe that our ability to meaningfully pursue our substantial revision to our business plan, with our RexPro interior flooring and exterior tile, paver and hardscape line of coatings products being our current focal point in terms of business development as well as extending our coatings business to not only include manufacturing and distribution, but also, to vertically integrate by expanding into the applications services side of the business, in the immediate term will depend on the availability of working capital, the precise amount of which is uncertain as the date of this filing on Form 10-Q given certain variables surrounding our ability to generate funds internally, including through sales of product, sales of applications services utilizing our product and/or territorial product distributorships, on the RexPro advanced coatings side of our business, and through distributions, on the ACS side. To the extent that it becomes necessary to access funds through a public or private sales of securities, as we have been doing and expect to continue to have to do for the foreseeable future, this is likely to be pursued through one or more offerings involving common stock, preferred stock and/or convertible notes or debentures. In connection with any such financings, it may become necessary given market conditions and the unavailability of alternative options for us to issue additional shares of our common stock or securities exchangeable for shares of our common stock, including but not limited to convertible preferred stock or convertible notes or debentures containing so-called “floorless convertible” provisions that can be, and often are, extremely dilutive to existing stockholders upon conversion. Any such issuances, as well as any related issuances of common stock or other purchase warrants, would likely have the effect of depressing the market price of our common stock and diluting the interests of our common stockholders, potentially very significantly. (See Note 10 – Related Party Transactions.)

No attempt has been made for many years to secure any bank or other secured financing due to management’s practical conclusion that it would be an unproductive allocation of human resources given our historic revenue and cash flow levels, internal financial ratios, and negative working capital position. We do not expect any change in this status for the foreseeable future.

Discontinued Operations

As of September 30, 2019 and December 31, 2018, the Company has presented $114,368 of accrued royalties in discontinued operations. The royalties pertain to the Company’s sale of the QuickVerse^® product line in 2011.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by paragraph (b) of Rule 13a-15 under the Exchange Act, our principal executive and principal financial officers are responsible for assessing the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(f) under the Exchange Act). Accordingly, we maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our Chief Executive Officer/Chief Financial Officer has evaluated our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q September 30, 2019, and has determined that such disclosure controls and procedures are not effective. Our disclosure controls and procedures are not effective as a result of the material weakness in internal control over financial reporting because of inadequate segregation of duties over authorization, review and recording of transactions as well as the financial reporting of such transactions. Management is attempting to develop a plan to mitigate the above material weaknesses.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the fiscal quarter covered by this report, other than those disclosed above that materially affected, or is reasonable likely to materially effect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As of the date of this quarterly report on Form 10-Q for the nine months ended September 30, 2019, and to the best knowledge of our officers and directors, there are no pending material legal proceedings to which we were a party and none are threatened or contemplated. There can be no assurance, however, that we will not be made a party to litigation in the future.

ITEM 1A. RISK FACTORS.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

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

As of the date of this quarterly report on Form 10-Q for the period ended September 30, 2019, there were no reportable events under this Item 2.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

For the period ended September 30, 2019, we are in default under a certain unsecured term note to a former shareholder in the total amount of approximately $63,000. The arrearage as of such date was $28,783, plus interest. In accordance with the terms of the note, however, our default has triggered an acceleration of the entire balance plus accumulated interest.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5. OTHER INFORMATION.

As of the date of this quarterly report on Form 10-Q for the period ended September 30, 2019, there were no reportable events under this Item 5.

ITem 6. Exhibits.

Exhibits required by Item 601 of Regulation S-K.