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ENERGY TELECOM, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[October 29, 2014]

ENERGY TELECOM, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.



Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.

Overview We were incorporated on September 7, 1993 under the laws of the State of Florida as The Energy Corp. On April 24, 2004, we changed our name to Energy Telecom, Inc.


Our mission is to monetize our global utility patent portfolio with claims covering nearly all features of Intelligent Eyewear (IE) in the pipeline from major technology providers, including Google, Microsoft, Samsung and Sony. We have had preliminary discussions with, and continue to seek out, intellectual property (IP) management/exploitation firms and investment groups that are interested in discussing transactions that can exploit our IP to achieve maximum shareholder value.

We consider our IP in three tiers, with each tier building upon the successful claims in the prior tier, as follows: Tier Description I Hearing Protection and Communication Eyewear.

II Communication Eyewear with Advanced Audio Control and Option for Wireless Earpieces.

III Awareness, Connectivity, and Safety Eyewear Providing Advanced Biometric and Situational Awareness to Impart Knowledge and Entertainment to the Wearer.

Our IP is owned outright by Energy Telecom and is not encumbered by royalties, licenses, liens or contractual rights.

The Problem Modern society has developed so that people require constant access to the world of information they require, especially when mobile. The problem is those mobile users must still hold their information source to their ears with their hands, or use messy earplugs and cords, and then only to receive audio information. The current crude methods of people receiving information into their ears and eyes date back hundreds of years. Additionally, information users require a rapidly increasing awareness of the conditions around them, and their locational status, as do others far from the users.

Solution All of our issued and pending patents are utility patents and provide superior protection against possible infringement. Our Tier I and Tier II IP covers delivery of sound, communication and intelligence through the ear canal. Our Tier III issued and pending patents cover the delivery of a wide range of information, which can include environmental data, locational and situational status of the user, locational data of potentially hazardous objects near the user, as well as biometric data. IE protected by our patents also includes delivery of entertainment, and the exchange of optical and audio information to and from the wearer through optical display and audio means, including high-fidelity stereo music.

In connection with our Tier I and Tier II IP and as part of a pilot program to introduce on a wide-scale global basis the idea of IE, we independently developed the world's first hands-free two-way, sound attenuating wireless telecommunication eyewear. This professional eyewear is currently being licensed and distributed by Honeywell International, and has been available since 2012.

The eyewear is designed for use on a recreational and professional basis. Our recreational eyewear (currently licensed and distributed by Blaupunkt Personal Audio) is equipped with wireless two-way Bluetooth voice communication capable of streaming high-fidelity stereo music from any Bluetooth enabled device. It contains built-in dual microphones to cancel out background noise and noise-isolating ear plugs. Our professional model is similar to the recreational model, but contains additional safety features and is intended to be marketed to the Personal Protective Equipment (PPE) markets for use by police, fire, rescue, military and security personnel as well as companies in bio-hazardous, mining, construction and heavy manufacturing.

13 -------------------------------------------------------------------------------- [[Image Removed]] Honeywell International Inc., acting through its Honeywell Safety Products business unit, has been selling our communication eyewear, primarily in the PPE markets, under its branded 'ICOM' name in Europe and UVEX branded 'AcccoustiMaxx' in the United States.

[[Image Removed]] In January 2014, Blaupunkt Personal Audio, LLC introduced a version of the eyewear optimized for consumer mobile entertainment and voice communications. The eyewear is being sold worldwide under the 'Blaupunkt' brand.

Eyewear sold under our Tier I and Tier II IP allowed us to prove our concept, take the product to market and engage in significant product testing and refinement. It should be noted that our IP is not limited to glasses or eyewear, but includes any type of lens of any type of see-through material in front of the wearer's face, including goggles, shields and masks.

However, with the issuance of the first utility patent for our Tier III IP in June 2014, and filing of our immediate continuation-in-part (CIP) patent application that enlarges the scope of IE covered by our claims, we began focusing on maximizing the opportunities this patent provides for the newly emerging IE market. We believe there is significant value therein and intend to monetize our IP.

Our Advantage Our patents are "first rung" utility patents that cover eyewear of any kind with primary first claims describing "len(s), delivering of "sound to the ear" through the only viable method -to the ear canal-, "communication", and now intelligence, i.e. the wearers condition and orientation, movements, the environment around the eyewear user, and, the ability to exchange the information bi-laterally with remote sources.

It should be noted that while many other possible competitors file patent applications describing and showing IE with in-ear delivery, they concentrate on an entire world of potential optical delivery, but do not include that delivery of in-ear audio in their claims. This issue has been overlooked by others to their detriment. Energy Telecom did not overlook this critical factor in its Tier II and III utility patents.

As a result, we believe that our IP will cover almost all conceivable intelligence being gathered and presented to the wearer, and to other people/systems on a remote basis.

14 -------------------------------------------------------------------------------- Competition The IE market is quickly developing, and major technology companies are in various stages of producing products. Google is currently selling its Google Glasstm, and Microsoft, Samsung and Sony have announced IE products that are expected to be available in the near future. Other large companies are expanding into the larger wearable technology market.

There are also many start-ups and emerging companies that are attempting to combine the value of Intelligent Eyewear with other markets. For example, DAQRI has announced plans to merge IE with the PPE market with its Smart Helmet. This market segment, while new, is rapidly expanding as the PPE markets demand more intelligence, protection, and communication at work.

We have, through our IP counsel, put potential competitors on notice as to our intellectual property rights and made clear that we will enforce our rights against any infringing products. We and our IP counsel monitor the markets for Intelligent Eyewear that might possibly infringe on the Company's IP, and enforce our rights accordingly. We have previously stopped companies from selling possibly infringing foreign-made communication eyewear. Recently, Google contacted us about helping with a PPE model of their Google Glass, which we declined to do.

Potential Markets Sight and Hearing Impaired One particular market channel, out of many wearable technology markets covered by our patents, that we believe our Tier III IP can have a significant impact on is those who are sight or hearing impaired. We believe that our IE eyewear, alone or with applications from third parties, will have the ability to do the following: · Read text of lectures or of ongoing conversations in a room without needing to have visual line of site; · Speech to text processes; · Real-time translation of foreign languages being spoken, with the earplugs blocking out the foreign language; · Processors to alert to alarm noises, honking horns and the safety related volume, urgency, proximity and vector information can be sent to audio, vibratory, and/or visual inputs; · Vibration devices in the eyewear can signal to blind people obstacle locations - left, right, front; · IE at the side of the neck to have Braille words "imprinted" (by shifting mechanical or air-puff devices) and "read" against their skin; and · A cell phone attachment to have a braille reader screen for text messages.

Medical industry Hospital/Doctor's offices: · Display of medical records through video or static display; · Internet access to records and diagnosing aids; · Determine presence of harmful radiation or gases, and notify wearer though sound or visual aids; · Report unsafe conditions around the wearer to remote supervisory and/or monitoring locations; · Determine condition and state of the wearer (prone for too long, as just one example) and reporting to remote locations, for assistance; · Use in venues requiring 'splash' protection for the eyes; · Maintain constant contact with supervisors and peers; and · Display of important text messages.

15-------------------------------------------------------------------------------- Dentistry (UVEX PPE eyewear already used in Dentist's offices today): · Dentist or technician can speak to the patient through the eyewear; · Patients watch live video of procedure; · Patients watch instructive videos or movies during lengthy procedures; · Use by patients during cleaning and other work, to protect eyes; and · Patients listen to soothing music.

High Fidelity Stereo Music in Conjunction with Outdoors Activities The Blaupunkt high-fidelity sound model currently available for sale already is able to deliver concert-hall quality through advanced audio drivers, more expensive disposable ear plugs, advanced noise suppression, and proprietary audio control software program.

Outdoors recreation, including: · Biking; · Jogging; · Hiking; · Beach use; · Hunting; · Skiing; · Maintaining contact with others through display of text or video messaging; · While in use in any of the above, receiving weather updates, and monitoring body output (heart, pulse, etc.) during use; and · Determining condition and state of the wearer (prone for too long, as just one example) and reporting to remote locations, for assistance.

Casual use, including: · Outdoor casual 'hanging out' alone or with friends; · Watching short videos; and · Watching movies while outdoors.

16-------------------------------------------------------------------------------- Current Operating Trends and Financial Highlights Management currently considers the following events, trends and uncertainties to be important in understanding our results of operations and financial condition during the current fiscal year: · The Company is undertaking an initiative to seek to maximize and monetize the value of its intellectual property assets through a possible sale or license of its patent portfolio; · We have multiple patent applications pending in the United States and with the European Patent Office, and our patent counsel responds to their comments on regular basis to insure timely actions and filings. In addition, we have made the necessary filings to allow us to file patent applications in certain European and Asian counties if our pending patent applications are granted by the USPTO; and · Escalating tensions between North Korea and South Korea could disrupt our operations. The telecommunication eyewear frames are manufactured by Samsin Innotec, which has plants in South Korea. In addition, all the components are shipped to South Korea, where they are assembled and tested, and then shipped out as a product ready for sale.

Results of Operations The following discussion of the financial condition and results of operations should be read in conjunction with the unaudited condensed financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.

Three months ended September 30, 2014 compared to the three months ended September 30, 2013 Revenue, Cost of Sales and Gross Profit Revenue for the three months ended September 30, 2014 was $-0- as compared to $187,575 for the three months ended September 30, 2013. Revenue for three months ended September 30, 2013 was comprised completely of sales. Revenue decreased as our primary efforts are moving away from sales in the traditional PPE market and towards monetizing our intellectual property in the newly developing intelligent eyewear market. Our cost of sales was $146,520 for the three months ended September 30, 2013, netting us a gross profit of $41,055, for a 21.9% gross profit margin. Cost of sales relating to product sales include various product introduction costs, such as eyewear that was given away for free to potential vendors and distributors and sales made at a loss or at cost to obtain customer feedback.

Operating Expenses For the three months ended September 30, 2014 and 2013, general and administrative expenses totaled $140,664 and $74,093, respectively, representing a period to period increase of $66,571. The primary increase in our general and administrative expenses was stock-based compensation expense (non-cash) of $92,966 for the three months ended September 30, 2014 compared to $16,856 for the three months ended September 30, 2013, an increase of $76,110, net with reduction in travel related expenses in the current period as compared to the prior year.

In addition, included in general and administrative expenses for the three months ended September 30, 2014 and 2013 were professional fees totaling $38,753 and $38,004, respectively. Of the professional fees, accounting fees decreased to $6,006 in the current period from $15,185 for the three months ended September 30, 2013, legal fees increased by $2,660 to $7,122 for the three months ended September 30, 2014 from $4,462 from the three months ended September 30, 2013 and other consulting fees increased to $25,624 for the three months ended September 30, 2014 as compared to $18,357 for the same period last year. The increase in other consulting fees of $7,267 resulted primarily from the change in fair value of the stock based payments for the services provided. We also incurred patent maintenance, non-recurring engineering costs and prototype development costs in aggregate of $7,964 for the three months ended September 30, 2014 as compared to $5,907 for the same period in 2013.

Other Income and Expenses Previously, we sold Series A convertible preferred stock that contained certain anti-dilutive provisions. As such, we are required to record the fair value of these anti-dilutive provisions at the time issuance as a liability and mark to market to each reporting period. For three months ended September 30, 2013, we recorded a gain on change in the fair value of these derivative liabilities of $92,218, compared to $-0- for the current period. As of March 31, 2014, all anti-dilutive provisions had expired.

We incurred interest expense of $1,164 and $1,352 for the three months ended September 30, 2014 and 2013, respectively. The decrease is due to reductions in related party debt obligations resulting in lower incurred interest.

Interest income was $22 and $46 for the three months ended September 30, 2014 and 2013, respectively. The change in interest income is a result of lower carrying balances in our interest bearing accounts.

Net Income (Loss) For the three months ended September 30, 2014, we had net loss of $(142,055) (($0.01) per share of common stock) as a result of the foregoing, compared to a net income of $57,473 ($0.01 per share of common stock) for the three month ended September 30, 2013.

17 -------------------------------------------------------------------------------- Nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 Revenue, Cost of Sales and Gross Profit Revenue for the nine months ended September 30, 2014 was $1,292 as compared to $369,000 for the nine months ended September 30, 2013. Revenue for nine months ended September 30, 2014 and 2013 was comprised completely of sales. Revenue decreased as our primary efforts are moving away from sales in the traditional PPE market and towards monetizing our intellectual property in the newly developing intelligent eyewear market. Our cost of sales was $1,271 for the nine months ended September 30, 2014, netting us a gross profit of $21, for a 1.6% gross profit margin, as compared to cost of sales of $294,903 for the nine months ended September 30, 2013, netting us a gross profit of $74,097, for a 20.0% gross profit margin. Cost of sales relating to product sales include various product introduction costs, such as eyewear that was given away for free to potential vendors and distributors and sales made at a loss or at cost to obtain customer feedback.

Operating Expenses For the nine months ended September 30, 2014 and 2013, general and administrative expenses totaled $545,668 and $359,859, respectively, representing a period to period increase of $185,809. The primary increase in our general and administrative expenses was stock-based compensation expense (non-cash) of $349,736 for the nine months ended September 30, 2014 compared to $135,266 for the nine months ended September 30, 2013, an increase of $214,470.

In addition, included in general and administrative expenses for the nine months ended September 30, 2014 and 2013 were professional fees totaling $145,209 and $135,022, respectively. Accounting and legal professional fees decreased by $2,526. Consulting fees incurred for the nine months ended September 30, 2014 and 2013 were $73,550 and $60,837, respectively. The increase of $12,713 resulted primarily from the change in fair value of the stock based payments for the services provided. We also incurred patent maintenance, non-recurring engineering costs and prototype development costs in aggregate of $40,233 for the nine months ended September 30, 2014 as compared to $54,524 for the same period in 2013.

Other Income and Expenses Previously, we sold Series A convertible preferred stock that contained certain anti-dilutive provisions. As such, we are required to record the fair value of these anti-dilutive provisions at the time issuance as a liability and mark to market to each reporting period. For nine months ended September 30, 2014, we recorded a gain on change in the fair value of these derivative liabilities of $52,071, compared to $382,422 for the same period last year. As of March 31, 2014, all anti-dilutive provisions had expired.

We incurred interest expense of $3,758 and $3,935 for the nine months ended September 30, 2014 and 2013, respectively. The decrease is due to reductions in related party debt obligations resulting in lower incurred interest.

Interest income was $91 and $193 for the nine months ended September 30, 2014 and 2013, respectively. The change in interest income is a result of lower carrying balances in our interest bearing accounts.

Net Income (Loss) For the nine months ended September 30, 2014, we had net loss of $(498,092) (($0.05) per share of common stock) as a result of the foregoing, compared to a net income of $91,715 ($0.01 per share of common stock) for the nine months ended September 30, 2013.

Liquidity and Capital Resources As of September 30, 2014, we had working capital of $101,314. For the nine months ended September 30, 2014, we used $193,053 in cash in operating activities and $nil in investing activities. Cash provided by financing activities during the nine months ended September 30, 2014 totaled $88,000 from the sale common stock, net with $12,486 repayments of related party loans. From time to time since our formation in 1993, we have sold shares to investors in private placement transactions.

We expect capital expenditures during the next 12 months for marketing, advertising, inventory, equipment and overhead. During the nine months ended September 30, 2014, we incurred certain non-recurring expenses. As a result, we have sufficient capital resources to meet our projected cash flow requirements to conduct our proposed operations for at least the next five months. However, we will require additional financing in order to execute our operating plan. We cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. We may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, we may be unable to implement our current plans for expansion or respond to competitive pressures, any of these circumstances would have a material adverse effect on our business, prospects, financial condition and results of operations. During the nine months ended September 30, 2014, we raised $75,514 (comprised of sale of common stock of $88,000, net with repayments of shareholder loan of $12,486), compared with $151,000 for the nine months ended September 30, 2013 (comprised of sale of Series A convertible preferred stock of $152,000, net with repayments of shareholder loans of $1,000).

As of September 30, 2014, we had working capital of approximately $101,000. We currently use about $21,500 per month for continuing operations, which includes general operating expenses (office lease, utilities, salary and insurance), promotion and marketing (travel, entertainment, meals and website development), prototype development (parts, engineering and testing), and professional services (accounting, legal, professional and state fees and intellectual property fees). We expect that our burn rate will decrease over the next twelve months as we expend less money on prototype development. In addition, $45,630 of our current liabilities of $57,783 represents accrued interest due to our founder and Chief Executive Officer, Thomas Rickards.

We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our historical operating losses, our operations have not been a source of liquidity. We may seek additional capital in order to develop operations and become profitable. In order to obtain capital, we may need to sell additional shares of common or preferred stock or borrow funds from private lenders pursuant to instruments which are junior to our outstanding secured debt instruments. There can be no assurance that we will be successful in obtaining additional funding.

18 -------------------------------------------------------------------------------- Preferred Stock Financings Between November 2012 and March 2013, we issued an aggregate of 3,946.3 shares of our series A convertible preferred stock ("Series A Preferred Stock"), at a price of $100 per share of Series A Preferred Stock, for aggregate cash proceeds of $366,895 and the exchange of an aggregate of 79,874 shares of our common stock (the "Financings").

Each share of Series A Preferred Stock has a stated value of $100 (the "Stated Value"). The holders may convert, at any time, shares of Series A Preferred Stock into the number of shares of our Common Stock obtained by dividing the Stated Value by the Conversion Price then in effect. The conversion price is $0.3468, subject to adjustment (the "Conversion Price").

Upon the occurrence of certain triggering events, the holders have the right to require us to redeem all or a portion of the shares of Series A Preferred Stock. The redemption price is the greater of (A) the number of shares of Common Stock that the Series A Preferred Stock being redeemed are convertible into multiplied by the average market price on the date of redemption or (B) the Stated Value of the Series A Preferred Stock being redeemed multiplied by a Redemption Premium. The "Redemption Premium" is (A) 125% in the event that we fail to have the Common Stock be quoted on the OTC-QB or OTC-PK for a period of 10 days during any period of 12 months; (B) 250% in the event that we make any statement that we intend to not comply with proper requests for conversion of the Series A Preferred Stock; or (C) 200% in the event that we fail to timely file an Annual Report on Form 10-K, an Quarterly Report on Form 10-Q or a Current Report on Form 8-K in the time periods that are required of a company with securities registered under Section 12 of the Securities Exchange Act of 1934, as amended.

We have the right, at any time after two years from the closing date, to redeem all or a portion of the Series A Preferred Stock, upon 120 days prior written notice. The redemption price per share of Series A Preferred Stock shall equal 200% of the Stated Value. In addition, upon the occurrence of a change in control or a liquidation, dissolution or winding up of our company, the holders have the right to receive, at their election, either 200% of the Stated Value per share of Series A Preferred Stock, or share in our assets being distributed on a pro rata basis as if the Series A Preferred Stock had been converted into shares of Common Stock.

Pursuant to the certificate of designation for the Series A Preferred Stock, the holders may not convert Series A Preferred Stock if such conversion would result in such holder beneficially owning in excess of 4.99% of our then issued and outstanding common stock. The holders may, however, increase this limitation (but in no event exceed 9.99% of the number of shares of Common Stock issued and outstanding) by providing us with 61 days' notice that such holder wishes to increase this limitation.

In connection with the Financings, we granted the holders piggyback registration rights for a period of two years from the closing date of such Financing.

Loans Payable to Related Party From time to time, we have received financing from Thomas Rickards, our Chief Executive Officer and sole Director. The stockholder loans bear interest of 10% per annum, compounding annually and are due on demand.

The following table summarizes stockholder loans payable as of September 30, 2014 and December 31, 2013: September 30, December 31, 2014 2013 Loans payable, due on demand, interest at 10% $ - $ 12,486 Accrued interest 45,630 43,887 $ 45,630 $ 56,373 During the nine months ended September 30, 2014, we repaid $14,500 comprising repayments of loan of $12,486 and accrued interest of $2,014.

Critical Accounting Policies Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.

19 -------------------------------------------------------------------------------- We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our results of operations, financial position or liquidity for the periods presented in this report.

The accounting policies identified as critical are as follows: Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.

Revenue Recognition We recognize revenue on four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. Revenue is generally recognized upon shipment.

Cash and Cash Equivalents We consider financial instruments with an original maturity date of three months or less to be cash equivalents.

Patents Our patents (U.S. 5,717,479, U.S. 6,012,812, U.S. 6,950,531, U.S. 7,133,532, U.S. 8,243,973 and other international patents) which describe the general means for delivering sound through disposable sound attenuating components, are capitalized at the original cost, if purchased, or at the carrying basis of the transferor if contributed by an entity under common control. Patent costs, if any, are amortized using the straight-line method over their estimated period of benefit remaining. We evaluate the recoverability of patents annually taking into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. Costs of developing patents that are not specifically identifiable, that have indeterminate lives, or that are inherent in the continuation of our business are recognized as an expense when incurred.

Share-Based Compensation Share-based compensation issued to employees is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. We measure the fair value of the share-based compensation issued to non-employees using the stock price observed in the arms-length private placement transaction nearest the measurement date (for stock transactions) or the fair value of the award (for non-stock transactions), which were considered to be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete.

We measure the fair value of shares issued as share-based compensation using the stock price observed in the arms-length private placement transaction nearest the measurement date, which was considered to be a more reliably determinable measure of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete.

Income Taxes We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized, net of a valuation allowance, for the estimated future tax effects of deductible temporary differences and tax credit carry-forwards. A valuation allowance against deferred tax assets is recorded when, and if, based upon available evidence, it is more likely than not that some or all deferred tax assets will not be realized.

20 -------------------------------------------------------------------------------- There were no unrecognized tax benefits at September 30, 2014 and December 31, 2013. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There were no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the year. We have determined we have no uncertain tax positions.

Net Loss per Common Share Basic loss per share computed by dividing the net loss attributable to the common stockholders (the numerator) by the weighted average number of shares of Class A common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into Class A common stock, such as Series A Convertible Preferred Stock and Class B common stock, stock options and warrants (using the "treasury stock" method), unless their effect on net loss per share is anti-dilutive. The effect of computing diluted loss per share is anti-dilutive and, as such, basic and diluted loss per share is the same for the three and nine months ended September 30, 2014.

Derivative Financial Instruments We account for derivative instruments in accordance with ASC 815, "Derivatives and Hedging", which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value. Accounting for changes in the fair value of derivative instruments depends on whether the derivatives qualify as hedge relationships, and the types of relationships designated are based on the exposures hedged. Our derivative financial instruments consisted of reset provisions related to Series A convertible preferred stock. These embedded derivatives included certain conversion features and reset provisions. As of March 31, 2014, these embedded derivatives expired.

Recently Issued Accounting Pronouncements The FASB has issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.

This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We have not yet determined the effect of the adoption of this standard and whether it is expected to have a material impact on our condensed financial position and results of operations.

The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. We have not yet determined the effect of the adoption of this standard and whether it is expected to have a material impact on our condensed financial position and results of operations.

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

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying financial statements.

Off-Balance Sheet Arrangements We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.

Inflation The effect of inflation on our revenue and operating results was not significant.

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