OMNIQ Corp. - Quarter Report: 2014 September (Form 10-Q)

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QUEST SOLUTION, INC.

(F.KA. AMERIGO ENERGY, INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

The accompanying notes to the financials should be read in conjunction with these financial statements.

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QUEST SOLUTION, INC.

(F.KA. AMERIGO ENERGY, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

The accompanying notes to the financials should be read in conjunction with these financial statements.

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QUEST SOLUTION, INC.

(F.KA. AMERIGO ENERGY, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(UNAUDITED)

The accompanying notes to the financials should be read in conjunction with these financial statements.

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QUEST SOLUTION, INC

(FKA AMERIGO ENERGY, INC.)

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2013 and notes thereto included in the Company's Form 10-K. The Company follows the same accounting policies in the preparation of interim reports.

Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014.

Summary of Significant Accounting Policies

This summary of significant accounting policies of Quest Solution, Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

Use of estimates

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

Cash

Cash consists of petty cash, checking, savings, and money market accounts.  For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of September 30, 2014 and December 31, 2013.

The Company maintains its cash in bank deposit accounts which, at times, may exceed federal insured limits.

Accounts Receivable

Accounts receivable are carried at their estimated collectible amounts. The Company provides allowances for uncollectible accounts receivable equal to the estimated collection losses that will be incurred in collection of all receivables. Accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company’s management determines which accounts are past due and if deemed uncollectible, the Company charges off the receivable in the period the determination is made. The Company generally requires no collateral to secure its ordinary accounts receivable.

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Property and Equipment

Property and equipment are stated at cost and depreciated using both straight-line and accelerated methods over estimated useful lives ranging from 3 to 15 years. Upon disposition of property and equipment, related gains and losses are recorded in operations. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred.

Shipping and Handling Costs

The Company classifies shipping and handling costs as operating expenses in the statements of income.

Advertising

The Company generally expenses advertising costs as incurred.

Inventory

Substantially all inventory consists of finished goods and are valued based upon first-in first-out ("FIFO") cost, not in excess of market. The determination of whether the carrying amount of inventory requires a write-down is based on a detailed evaluation of inventory relative to any potential slowing moving products or discontinued items as well as the market conditions for the specific inventory items.

Depreciation and amortization

Depreciation and amortization expense primarily consists of the non-cash write-down of tangible and intangible assets over their expected economic lives. We expect this expense to continue to grow in absolute dollars and potentially as a percentage of revenue as we continue to grow and incur capital expenditures to improve our technological infrastructure and acquire assets through potential future acquisitions.

Revenue Recognition

Recurring technology and services revenue consists of subscription-based fees, software subscription license fees, software maintenance fees and hosting fees related to the use of our solution to manage our customers' communications expenses, as well as fees for perpetual software licenses and professional services and products sold.

We recognize revenue when persuasive evidence of an arrangement exists, pricing is fixed and determinable, collection is reasonably assured and delivery or performance of service has occurred. Recurring technology and services subscription-based fees, software subscription license fees, software maintenance fees and hosting fees are recognized ratably over the term of the period of service. The subscription-based services we provide include help desk, staging, carrier activations and provisioning.

Sales revenue is recognized upon the shipment of merchandise to customers.  The Company recognizes revenues from software sales when software products are shipped.

Software license fees consist of fees paid for a perpetual license agreement for our technology, which are recognized in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 605, Software Revenue Recognition, as amended.

Professional services related to the implementation of our software products, which we refer to as consulting services, are generally performed on a fixed fee basis under separate service arrangements. Consulting services revenue is recognized as the services are performed by measuring progress towards completion based upon either costs or the achievement of certain milestones.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, accounts receivable, accounts payable, and notes payable. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at September 30, 2014 and December 31, 2013. The Company did not engage in any transaction involving derivative instruments.

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As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The three levels of the fair value hierarchy are described below:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

Recent pronouncements

The Company’s management has reviewed all of the FASB’s Accounting Standard Updates through September 30, 2014 and has concluded that none will have a material impact on the Company’s financial statements. Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying consolidated financial statements.

Goodwill

We test our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is December 31, at which date we test our reporting units, which is currently our ownership in Quest Solution, Inc.

As the acquisition occurred during the nine months ended September 30, 2014 we are in the process of completing our goodwill impairment testing by considering multiple avenues inclusive of a qualitative assessment, a market approach and a discounted cash flow method. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the segments beyond the cash flows from the discrete projection period.

We have not yet completed our impairment testing. However, based on our analysis performed thus far with respect to these segments as described above, we believe that the goodwill related to the Quest Solution acquisition was not impaired as of September 30, 2014.

NOTE 2 - ACQUISITION OF QUEST SOLUTION, INC.

On January 10, 2014, the Company completed the purchase of Quest Solution, Inc. ("Quest"), an Oregon corporation in the technology, software, and mobile data collection systems business.

The purchase price for Quest was $16,000,000.

The consideration given to the shareholders of Quest Solution, Inc. were as follows:

A.  A promissory note for $4,969,000, which payments are to be a minimum of 45.0% of the cash earned from EBITDA of Quest Solution, Inc. during the prior quarter.  Once the Holder has received $3,375,000, the principal and interest payments on the promissory note are to be a minimum of 22.5% of the cash earned from EBITDA of Quest Solution, Inc. during the prior quarter.  

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The balance of the promissory note is expected to be paid before February 18, 2016, or twenty five (25) months from the date of execution of this agreement. Should the cash flow and payments from EBITDA during the term of this agreement not be sufficient to pay off the loan prior to its maturation, the loan will extend for additional twelve (12) months periods till paid off.  

The holder of the note is permitted to convert up $1,594,000 of the Promissory Note into common shares of the Company at a ratio of one share for every $1.00 of promissory note converted.  This conversion feature is non-transferrable without written consent from the Company.  

B.  A promissory note for $11,031,000, which payments are to be payments on the promissory  note are  to  be a minimum of forty five percent (45%) of the cash earned from EBITDA of Quest Solution, Inc. during the prior quarter.  Once the first promissory note ($4.97mm) has received $3,375,000, the principal and interest payments on this promissory note are to be a minimum of 67.5% of the cash earned from EBITDA of Quest Solution, Inc. during the prior quarter.  

The balance of the promissory note is expected to be paid before January 18, 2017, or three (3) years from the date of execution of this agreement.  Should the cash flow and payments from EBITDA during the term of this agreement not be sufficient to pay off the loan prior to its maturation, the loan will extend for additional twelve (12) months periods till paid off.  

The holders of the notes are permitted to convert up to $4,781,000 of the Promissory Note into common shares of the Company at a ratio of one share for every $1.00 of promissory note converted. This conversion feature is non-transferrable without written consent from the Company.  

The prior owners of Quest shall retain a security interest in the subsidiary until the promissory note is satisfied.  

In accordance with ASC 805-10-25-13, the following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition and the preliminary allocation of the purchase price to the fair value of net assets acquired:

NOTE 3 - INTEREST AND LOAN RECEIVABLE

Concurrent with the company entering into a line of credit agreement for production in 2013, the Company entered into a corresponding line of credit with its supply chain related to the production of the liquor brands.  The line of credit for the importer is $100,000, which will bear interest at 20% of funds advanced.  The line of credit was guaranteed by the importer as well as the owner of the import company, personally. As of September 30, 2014 and December 31, 2013, the balance of the loan receivable was $0 and $78,733.  This loan was settled during first quarter 2014 and the line of credit was closed.

NOTE 4 - PREPAID EXPENSES, RELATED PARTY

As of September 30, 2014 and December 31, 2013 there were $289,590 and $76,032 of prepaid expenses in the company.  $275,279 of the prepaid expenses as of September 30, 2014 relate to shares issued to consultants which will be expensed over the respective term of the contract and warrant agreement.  See Note 8 for details on the shares and warrants issued.

As of September 30, 2014, there were $231,508 of related party prepaid expenses.  The prepaid expenses are made up of prepaid insurance which is being expensed through November 30, 2014 for insurance coverage paid for in 2013, which the policy period covers the company through November 30, 2014.  The Company deems this to be a related party expense as the prior owners of Quest Solution, Inc. are the controlling shareholders of the insurance company.  As of January 1, 2014, the Company will not be renewing any of these policies once they expire.  In the nine months ended September 30, 2014, $1,041,784 was expensed in cost of goods sold, related party.

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NOTE 5 - INTELLECTUAL PROPERTY

On February 25, 2013, the Company announced the acquisition of a license agreement for the promotion of a liquor line. In consideration for the acquisition, the Company agreed to issue 360,000 shares of its common stock fair valued at $32,400, warrants to purchase up to two million (2,000,000) shares of the Company’s common stock valued at $180,000 utilizing the Black-Scholes Model, and a convertible promissory note in the amount of $2,000,000. Pursuant to the terms of the agreement, the warrants were subject to specific vesting requirements related to sales benchmarks whereas for each 5,000 cases sold the seller will receive 500,000 fully vested warrants exercisable at a rate of $1.00 per share for a term of five years.  

On January 10, 2014, the Company came to terms on a settlement with its prior investment in the license and the related liquor brands.  The Company concurrently canceled its consulting contract related to the liquor line and received back 1,765,000 of the shares that had previously been issued in conjunction with this venture.   This cancellation also removed the $2,000,000 promissory note related to the acquisition, as well as the $65,000 annual consulting contract with the Consultant and the corresponding 2,000,000 warrants issued as well.  As of September 30, 2014, there are no amounts remaining due to this transaction.

During the period ending September 30, 2014, the company acquired four different licenses for technology.  The licenses acquired are for (1) re-enforcing steel detection, (2) gun barrel detection, (3) air frame inspection, and (4) mining belt guard inspection.  The cost of the first three licenses was $150,000 each with a 5% royalty on sales.  The term of these licenses is 15 years each.  A fourth license was acquired with minimum purchase requirements stated in the contract.  

NOTE 6 - LINE OF CREDIT

On March 22, 2013, the Company executed a line of credit agreement with a third party for $100,000 to be used as purchase order financing for the production of liquor brands.  The balance at September 30, 2014 and December 31, 2013 was $0 and $97,491.  This line of credit was closed during the first quarter of 2014.

During December of 2011, Quest Solution acquired a $750,000 revolving line of credit from Wells Fargo Bank. Borrowings are collateralized by accounts receivable, equipment and inventory owned by the Company as well as a personal guarantee from the two shareholders.  This line of credit expired September 15, 2014. Monthly interest only payments are required with the principal portion due at maturity. The balance at September 30, 2014 was $0.  Interest is charged at a rate of prime plus 0.5% (currently 3.75%), with a floor rate of 4.5%.

NOTE 7 - NOTES PAYABLE

Notes and loans payable consisted of the following:

As of September 30, 2014 and 2013, the Company record interest expense in connection with these notes in the amount of $0 and $70,996, respectively.

The $834,960 related party note has no definitive due date so it has been classified as current liabilities.

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NOTE 8 - STOCKHOLDERS' DEFICIT

As of September 30, 2014, there were 33,710,416 shares of common stock outstanding, and 500,000 preferred shares outstanding.

Preferred Stock

As of September 30, 2014, there were 25,000,000 preferred shares authorized and 500,000 preferred shares outstanding.  The board of directors had previously set the voting rights for the preferred stock at 1 share of preferred to 250 common shares.

Common Stock

In January 2014, concurrent with the cancellation of the license agreement, the Company cancelled two consulting agreements previously entered into during April 2013, in which shares previously issued were returned in full to the Company. A total of 1,765,000 shares valued at $105,900 were returned and canceled in full settlement.

On March 1, 2014, the Company issued a total of 100,000 shares valued at $41,000 to Douglas Zorn, the Company’s then Chief Operating Officer for services. The shares were fully earned and non assessable as of March 31, 2014. In addition the Company issued the same consultant a total of 900,000 warrants valued at $368,878. The value of these warrants estimated by using the Black-Scholes option pricing model with the following assumptions: exercise price of $1.50, term of 3 years; risk free interest rate of 0.69%; dividend yield of 0% and expected volatility of 433%. As of September 30, 2014 the agreement with this officer has been mutually cancelled and Mr. Zorn’s contract as Chief Operating Officer ceased at the end of August 2014.

During the first quarter of 2014, the Company issued warrants to executives of Quest Solution, Inc. with the following milestones:  

When the Company reaches $35,000,000 in sales, 5,000,000 warrants at $1.00 per share vest and become exercisable. These warrants expire on January 9, 2016.  

When the Company makes it to the NASDAQ or AMEX or larger exchange, 2,000,000 warrants at $3.00 per share vest and become exercisable. These warrants expire on January 9, 2017.

Additionally, when the Company reaches $40,000,000 in sales, a 2,000,000 share bonus is given to the executives. This expires January 8, 2017.

On May 9, 2014, the company issued a total of 240,000 shares valued at $124,800 for marketing services.

On August 8, 2014, the company issued 250,000 shares of stock related to warrants which were exercised.

On September 25, 2014, the company sold 50,000 shares valued at $25,000.

NOTE 9 - RELATED PARTY TRANSACTIONS

As of September 30, 2014, the Company had $180,000 in accrued payroll payable to the Company’s current officers.

As of September 30, 2014, the Company owes $51,456 in related party loans to the CEO who has made loans to the Company for expenses as well as $15,678 to an entity the CEO owns which lent the Company money.

As of September 30, 2014, an officer advanced $50,000 in relation to company expenses.

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As mentioned in Note 7, notes and loans payable consisted of the following:

As of September 30, 2014 and 2013, the Company record interest expense in connection with these notes in the amount of $0 and $70,996, respectively.

The $834,960 related party note has no definitive due date so it has been classified as current liabilities.

NOTE 10 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events in accordance with ASC 855 through the date in which it has made its financial statements available, and has identified no significant reportable events through that date.

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WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission this Form 10-Q, including exhibits, under the Securities Act. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at SEC's Public Reference Room located at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.

You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration statement, will also be available to you on the website maintained by the Commission at http://www.sec.gov.

We intend to furnish our stockholders with annual reports which will be filed electronically with the SEC containing consolidated financial statements audited by our independent auditors, and to make available to our stockholders quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial statements.

The Company maintains its website at http://www.QuestSolution.com.   Our website and the information to be contained on either site, or connected to either site, are not part of or incorporated by reference into this filing.

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

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This discussion contains forward-looking statements. The reader should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, 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 that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward- looking statements contained herein will be realized. Based on actual experience and business development, the Company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the Company's results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.

A complete discussion of these risks and uncertainties are contained in our Annual Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission on April 2, 2014.

Introduction

Quest Solution, Inc. has historically derived our revenues from various sources. Our strategy has developed into leveraging management's relationships for investments for the Company. The Company intends on continuing with its acquisition and holding strategy of existing companies with revenues and positive cash flow.

Through its wholly owned subsidiary, Quest Solution is a leading provider in the technology, software, and mobile data collection systems business.

Quest Solution is a national mobility systems integrator with a focus on design, delivery, deployment and support of fully integrated mobile solutions. The Company takes a consultative approach by offering end to end solutions that include hardware, software, communications and full lifecycle management services. The highly tenured team of professionals simplifies the integration process and delivers proven problem solving solutions backed by numerous customer references.

The following is a discussion of the Company’s financial condition, results of operations, financial resources and working capital. This discussion and analysis should be read in conjunction with the Company's financial statements contained in this Form 10-Q.

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Overview

RESULTS OF OPERATIONS

Revenues

For the three months ended September 30, 2014 and 2013, the company generated revenues in the amount of $9,120,927 and $804, respectively, the increase is attributable to the addition of our wholly owned subsidiary.  

For the three months ended September 30, 2014 and 2013, the company generated revenues on producing oil and gas properties in the amount of $0 and $0, respectively.

For the nine months ended September 30, 2014 and 2013, the company generated revenues in the amount of $26,287,892 and $1,559, respectively in revenues from such production the increase is attributable to the addition of our wholly owned subsidiary.  

For the nine months ended September 30, 2014 and 2013, the company generated revenues on producing oil and gas properties in the amount of $0 and $514, respectively.

Cost of Goods Sold

For the three months ended September 30, 2014 and 2013, the company recognized a total of $7,072,614 and $0, respectively in cost of goods sold the increase is attributable to the addition of our wholly owned subsidiary.  .  The company also recognized $347,261 and $0, respectively of cost of goods sold, related party from the insurance expenses paid in 2013 for a policy which covers the company through November 2014.

For the nine months ended September 30, 2014 and 2013, the company recognized a total of $20,086,597 and $0, respectively in cost of goods sold the increase is attributable to the addition of our wholly owned subsidiary.  .  The company also recognized $1,041,784 and $0, respectively of cost of goods sold, related party from the insurance expenses paid in 2013 for a policy which covers the company through November 2014.

Operating expenses

Total operating expense for the three months ended September 30, 2014 and 2013 recognized was $1,646,401 and $140,253, respectively the increase is attributable to the addition of our wholly owned subsidiary.   

Total operating expense for the nine months ended September 30, 2014 and 2013 recognized was $5,098,778 and $445,148, respectively the increase is attributable to the addition of our wholly owned subsidiary.   

Three Months Ended

General and administrative expenses for the three months ended September 30, 2014 totaled $222,754 and $780 during the comparable three month period. The increase is primarily the result of an increase in business activities related to the acquisition.

Salary and employee benefits for the three months ended September 30, 2014 totaled $1,252,445 as compared to $0 for the three months ended September 30, 2013. The increase is directly related to the acquisition.

Lease operating expense for the three months ended September 30, 2014 totaled $0 as compared to $95 for the three months ended September 30, 2013. The decrease is directly related to the decrease in interest the Company holds.

Stock compensation for the three months ended September 30, 2014 were $54,130 as compared to $135,878 for the three months ended September 30, 2013. The decrease was related to the company issuing less stock for services during the period.

Professional fees for the three months ended September 30, 2014 were $110,005 as compared to $3,500 for the three months ended September 30, 2013. The increase was related to the increase of professional accounting, consulting and legal services.

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Other income and expenses Three Months Ended

Interest Expense - Interest expense for the three months ended September 30, 2014 totaled $375 as compared to $41,907 for the three months ended September 30, 2013. The decrease is directly related to company paying in full various outstanding loans.

Interest Income - Interest income for the three months ended September 30, 2014 totaled $15,079 as compared to $0 for the three months ended September 30, 2013. The increase is directly related to the new operations.

Nine Months Ended

General and administrative expenses for the nine months ended September 30, 2014 totaled $723,344 and $13,829 during the comparable nine month period. The increase is primarily the result of an increase in business activities related to the acquisition.

Salary and employee benefits for the nine months ended September 30, 2014 totaled $3,895,458 as compared to $0 for the nine months ended September 30, 2013. The increase is directly related to the acquisition.

Lease operating expense for the nine months ended September 30, 2014 totaled $103 as compared to $282 for the nine months ended September 30, 2013. The decrease is directly related to the decrease in interest the Company holds.

Stock compensation for the nine months ended September 30, 2014 were $84,215 as compared to $192,663 for the nine months ended September 30, 2013. The decrease was related to the company not issuing as much stock for services during the period.

Professional fees for the nine months ended September 30, 2014 were $377,769 as compared to $238,374 for the nine months ended September 30, 2013. The increase was related to the increase of professional accounting, consulting and legal services.

Other income and expenses Nine Months Ended

Interest Expense - Interest expense for the nine months ended September 30, 2014 totaled $1,375 as compared to $103,878 for the nine months ended September 30, 2013. The decrease is directly related to company paying in full various outstanding loans.

Interest Income - Interest income for the nine months ended September 30, 2014 totaled $65,294 as compared to $0 for the nine months ended June 30, 2013. The increase is directly related to the new operations.

The company recorded a loss on license settlement in the amount of $93,578 for the nine months ended September 30, 2014 ($0 for the nine months ended September 30, 2013).  A further loss of $18,995 was recognized in the settlement of a note receivable for the nine months ended September 30, 2014 ($0 for the nine months ended September 30, 2013). The company recognized a gain on debt settlement of $181,948 for the nine months ended September 30, 2014 ($19,195 for the nine months ended September 30, 2013).

Net income (loss) attributable to common stock

The company realized a net income of $62,786 for the three months ended September 30, 2014, compared to a net loss of $181,356 for the three months ended September 30, 2013, an increase of $244,142. The increase in net income is attributable to the income from our wholly owned subsidiary.

The company realized a net income of $47,003 for the nine months ended September 30, 2014, compared to a net loss of $527,758 for the nine months ended September 30, 2013, an increase of $574,761. The increase in net income is attributable to the income from our wholly owned subsidiary.

Liquidity and capital resources

At September 30, 2014, we had cash in the amount of $1,584,699 and a working capital deficit of $3,740,709.  In addition, our stockholders' equity was $242,807 at September 30, 2014 and a stockholder deficit at December 31, 2013 of $108,705.

Our accumulated deficit decreased from $17,043,805 at December 31, 2013 to $16,996,802 at September 30, 2014.

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Our operations resulted in net cash provided of $1,074,306 during the nine months ended September 30, 2014, compared to cash used of $32,699 during the nine months ended September 30, 2013, an increase of $1,107,005.

Net cash by investing activities was $1,803,341 for the nine months ended September 30, 2014, compared to using net cash used of $88,810 for the nine months ended September 30, 2013, an increase of $1,892,151.

Our financing activities used net cash of $1,306,250 during the nine months ended September 30, 2014, compared to providing net cash of $121,454 during the nine months ended September 30, 2013, a decrease of $1,427,704.

Inflation

The Company's results of operations have not been affected by inflation and management does not expect inflation to have a material impact on its operations in the future.

Off- Balance Sheet Arrangements

The Company currently does not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS

We evaluated the effectiveness of our disclosure controls and procedures as of September 30 2014, the end of the period covered by this Quarterly Report on Form 10-Q. This evaluation was undertaken by our Chief Executive Officer and Chief Financial Officer, Jason F. Griffith.

Mr. Griffith serves as our principal executive officer and as our principal accounting and financial officer.  The Company utilizes a third party to assist in the financial statement preparation for the auditor and our wholly owned subsidiary has an accounting team to prepare the financials at that level.

We reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the fiscal quarter covered by this report, as required by Securities Exchange Act Rule 13a-15, and concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management on a timely basis, including our principal executive officer and principal financial and accounting officer.

CONCLUSIONS

Based on this evaluation, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file pursuant to the Exchange Act are recorded, processed, summarized, and reported in such reports within the time periods specified in the Securities and Exchange Commission's rules and forms.

CHANGES IN INTERNAL CONTROLS

There were no changes in our internal controls over financial reporting that occurred during the last fiscal quarter, i.e., the three months ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of September 30, 2014, the Company is not a party to any pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company, any owner of record or beneficially of more than five percent of the Company's Common Stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

 (a) Exhibits.

31.1 Certification of our Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of our Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

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SIGNATURES

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

Date: November 12, 2014

By: /s/ Jason F. Griffith

Jason F. Griffith

Chief Executive Officer,

and Chief Financial Officer

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