XOTC:MGLT Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
Form 10-Q
(Mark One)
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
OR
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from      to               
 
 
 
COMMISSION FILE NUMBER 333-151633
 
MAGNOLIA SOLAR CORPORATION
 
(Exact Name of small business issuer as specified in its charter)
 
 

Nevada
 
39-2075693
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
54 Cummings Park, Suite 316, Woburn, MA 01801
(Address of principal executive offices) (Zip Code)
 
Issuer’s telephone Number: (781) 497-2900
 
 
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o
 
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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer 
 
Accelerated filer  
     
Non-accelerated filer 
 
Smaller reporting company  x
(Do not check if a smaller
reporting company)
   
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
As of July 23, 2012, the issuer had 27,317,825 outstanding shares of Common Stock.


 
 
 


 

 


 


 
 
  PART I
 
 
MAGNOLIA SOLAR CORPORATION
 
(A DEVELOPMENT STAGE COMPANY)
 
CONSOLIDATED BALANCE SHEETS
 
JUNE 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011
 
   
             
ASSETS
       
   
June 30,
   
December 31,
 
   
2012
   
2011
 
CURRENT ASSETS
 
(unaudited)
       
   Cash
  $ 194,886     $ 255,862  
   Accounts receivable
    282,762       247,110  
   Prepaid expense
    1,417       1,417  
  Total current assets     479,065       504,389  
                 
Fixed assets, net
    2,910       4,084  
                 
OTHER ASSETS
               
   License with Related Party, net of accumulated amortization
    207,958       225,783  
  Total other assets     207,958       225,783  
                 
 
               
TOTAL ASSETS
  $ 689,933     $ 734,256  
                 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
         
                 
CURRENT LIABILITIES
               
   Accounts payable and accrued expenses
  $ 410,341     $ 316,517  
   Current portion of Original Issue Discount Senior Secured Convertible
               
     Promissory Note, net of discount
    2,000,000       2,000,000  
  Total current liabilities     2,410,341       2,316,517  
                 
                 
   Original Issue Discount Senior Secured Convertible Promissory Note, net of discount,
               
      net of current portion
    400,000       400,000  
                 
TOTAL LIABILITIES
    2,810,341       2,716,517  
                 
STOCKHOLDERS' DEFICIT
               
   Common stock, $0.001 par value, 75,000,000 shares authorized,
               
      27,109,162 and 26,670,000 shares issued and outstanding
    27,109       26,670  
   Additional paid in capital
    1,368,641       1,029,080  
   Additional paid in capital – warrants
    962,297       962,297  
   Deficit accumulated during the development stage
    (4,478,455 )     (4,000,308 )
  Total stockholders' deficit     (2,120,408 )     (1,982,261 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 689,933     $ 734,256  


 
MAGNOLIA SOLAR CORPORATION
 
(A DEVELOPMENT STAGE COMPANY)
 
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
AND FOR THE PERIOD JANAURY 8, 2008 (INCEPTION) THROUGH JUNE 30, 2012
 
                   
                   
               
JANUARY 8, 2008
 
               
(INCEPTION)
 
   
SIX MONTHS ENDED
   
SIX MONTHS ENDED
   
THROUGH
 
   
JUNE 30, 2012
   
JUNE 30, 2011
   
JUNE 30, 2012
 
                   
REVENUE
  $ 287,731     $ 372,588     $ 1,703,405  
                         
COST OF REVENUES
    187,021       189,187       1,058,346  
                         
GROSS PROFIT
    100,710       183,401       645,059  
                         
OPERATING EXPENSES
                       
    Indirect and administrative labor
    89,066       105,754       477,472  
    Professional fees
    424,908       133,302       1,084,583  
    Depreciation and amortization expense
    18,999       181,243       763,696  
    General and administrative
    26,029       27,322       693,755  
Total operating expenses
    559,002       447,621       3,019,506  
                         
NON-OPERATING EXPENSES
                       
    Interest expense including amortization of OID and debt discount, net
    19,855       554,182       2,104,008  
Total non-operating expenses
    19,855       554,182       2,104,008  
                         
NET LOSS
  $ (478,147 )   $ (818,402 )   $ (4,478,455 )
                         
                         
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
    26,799,408       24,065,635          
                         
NET LOSS PER SHARE
  $ (0.02 )   $ (0.03 )        
 
MAGNOLIA SOLAR CORPORATION
 
(A DEVELOPMENT STAGE COMPANY)
 
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011
 
AND FOR THE PERIOD JANAURY 8, 2008 (INCEPTION) THROUGH JUNE 30, 2012
 
                   
                   
               
JANUARY 8, 2008
 
               
(INCEPTION)
 
   
THREE MONTHS ENDED
   
THREE MONTHS ENDED
   
THROUGH
 
   
JUNE 30, 2012
   
JUNE 30, 2011
   
JUNE 30, 2012
 
                   
REVENUE
  $ 171,001     $ 171,034     $ 1,703,405  
                         
COST OF REVENUES
    115,256       110,174       1,058,346  
                         
GROSS PROFIT
    55,745       60,860       645,059  
                         
OPERATING EXPENSES
                       
    Indirect and administrative labor
    43,805       68,104       477,472  
    Professional fees
    366,896       75,366       1,084,583  
    Depreciation and amortization expense
    9,500       93,748       763,696  
    General and administrative
    11,210       14,956       693,755  
Total operating expenses
    431,411       252,174       3,019,506  
                         
NON-OPERATING EXPENSES
                       
    Interest expense including amortization of OID and debt discount, net
    9,946       287,771       2,104,008  
Total non-operating expenses
    9,946       287,771       2,104,008  
                         
NET LOSS
  $ (385,612 )   $ (479,085 )   $ (4,478,455 )
                         
                         
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
    26,928,816       24,172,308          
                         
NET LOSS PER SHARE
  $ (0.01 )   $ (0.02 )        


 
MAGNOLIA SOLAR CORPORATION
 
(A DEVELOPMENT STAGE COMPANY)
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
 
FOR THE PERIOD JANUARY 8, 2008 (INCEPTION) THROUGH JUNE 30, 2012
 
(INCLUDING MOBILIS RELOCATION SERVICES - PRE-MERGER)
 
   
                                     
                           
Deficit
       
                     
Additional
   
Accumulated
       
         
Additional
   
Paid-In
   
During the
       
   
Common Stock
   
Paid-In
   
Capital -
   
Development
       
   
Shares
   
Amount
   
Capital
   
Warrants
   
Stage
   
Total
 
                                     
Balance - November 19, 2007
    -     $ -     $ -     $ -     $ -     $ -  
                                                 
Common shares issued to founders for cash
    1,973,685       1,974       13,026       -       -       15,000  
                                                 
Common shares issued for cash - others
    2,500,001       2,500       35,500       -       -       38,000  
                                                 
Net loss for the period ended March 31, 2008
    -       -       -       -       (4,477 )     (4,477 )
                                                 
Balance - March 31, 2008
    4,473,686       4,474       48,526       -       (4,477 )     48,523  
                                                 
Net loss for the year ended March 31, 2009
    -       -       -       -       (31,115 )     (31,115 )
                                                 
Balance - March 31, 2009
    4,473,686       4,474       48,526       -       (35,592 )     17,408  
                                                 
Net loss for the period April 1, 2009 through
                                               
  December 30, 2009
    -       -       -       -       (5,719 )     (5,719 )
                                                 
To reflect the issuance of shares in the merger of
                                               
  Magnolia Solar Corp., net of the cancellation of
                                               
  founders shares
    19,356,314       19,356       289,144       -       (126,151 )     182,349  
                                                 
To reflect the issuance of warrants in the issuance
                                               
  of the Original Issue Discount Promissory Notes
    -       -       -       412,830       -       412,830  
                                                 
To reflect the issuance of warrants to the Placement Agent
    -       -       -       454,976       -       454,976  
                                                 
Net loss for the period December 30, 2009 through
                                               
  December 31, 2009
    -       -       -       -       (49,440 )     (49,440 )
                                                 
Balance - December 31, 2009
    23,830,000       23,830       337,670       867,806       (216,902 )     1,012,404  
                                                 
Common shares issued for services rendered
    100,000       100       82,400       -       -       82,500  
                                                 
Net loss for the year ended December 31, 2010
    -       -       -       -       (1,543,775 )     (1,543,775 )
                                                 
Balance - December 31, 2010
    23,930,000       23,930       420,070       867,806       (1,760,677 )     (448,871 )
                                                 
Common shares issued for services rendered
    400,000       400       78,350       -       -       78,750  
                                                 
To reflect the issuance of shares issued in
                                               
  Conversion of OID Notes
    1,040,000       1,040       258,960       -       -       260,000  
                                                 
To reflect the issuance of penalty shares related to
                                               
  Amendment of OID Notes
    1,300,000       1,300       271,700       -       -       273,000  
                                                 
Value of warrants issued for services
    -       -       -       94,491       -       94,491  
                                                 
Net loss for the year ended December 31, 2011
    -       -       -       -       (2,239,631 )     (2,239,631 )
                                                 
Balance - December 31, 2011
    26,670,000       26,670       1,029,080       962,297       (4,000,308 )     (1,982,261 )
                                                 
Common shares issued for services rendered
    330,000       330       329,670       -       -       330,000  
                                                 
Common shares issued for payment of interest
    109,162       109       9,891       -       -       10,000  
                                                 
Net loss for the six months ended June 30, 2012
    -       -       -       -       (478,147 )     (478,147 )
                                                 
Balance - June 30, 2012
    27,109,162     $ 27,109     $ 1,368,641     $ 962,297     $ (4,478,455 )   $ (2,120,408 )
MAGNOLIA SOLAR CORPORATION
 
(A DEVELOPMENT STAGE COMPANY)
 
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
 
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
AND FOR THE PERIOD JANAURY 8, 2008 (INCEPTION) THROUGH JUNE 30, 2012
 
                   
                   
               
JANUARY 8, 2008
 
               
(INCEPTION)
 
   
SIX MONTHS ENDED
   
SIX MONTHS ENDED
   
THROUGH
 
   
JUNE 30, 2012
   
JUNE 30, 2011
   
JUNE 30, 2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
   Net loss
  $ (478,147 )   $ (818,402 )   $ (4,478,455 )
                         
Adjustments to reconcile net loss
                       
  to net cash used in operating activities:
                       
    Depreciation and amortization expense
    18,999       181,245       763,696  
    Common stock issued for services rendered
    330,000       63,750       491,250  
    Common stock issued for penalty shares in the amendment of the OID Notes
    -       -       273,000  
    Common stock issued for payment of interest
    10,000       -       10,000  
    Warrants issued for services rendered
    -       -       94,491  
    Amortization of original issue discount and debt discount
    -       554,181       2,082,830  
                         
                         
                         
Change in assets and liabilities
                       
    (Increase) in accounts receivable
    (35,652 )     (83,809 )     (282,761 )
    (Increase) in prepaid expenses
    -       -       (1,417 )
    Increase (decrease) in accounts payable and accrued expenses
    93,824       18,042       410,340  
          Total adjustments
    417,171       733,409       3,841,429  
                         
          Net cash used in operating activities
    (60,976 )     (84,.993     (637,026 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
   Acquisition of fixed assets
    -       -       (8,288 )
   Deferred financing fees paid in connection with funding
    -       -       (154,800 )
          Net cash used in investing activities
    -       -       (163,088 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
   Issuance of stock for cash
    -       -       5,000  
   Proceeds received from loan payable - related party
    -       -       70,000  
   Repayment of loan payable - related party
    -               (70,000 )
   Net proceeds received from Original Issue Discount Promissory Notes
    -       -       990,000  
          Net cash provided by financing activities
    -       -       995,000  
                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (60,976 )     (84,993 )     194,886  
 
                       
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
    255,862       430,585       -  
 
                       
CASH AND CASH EQUIVALENTS - END OF PERIOD
  $ 194,886     $ 345,592     $ 194,886  
                         
                         
                         
SUPPLEMENTAL CASH FLOW INFORMATION:
                       
  Cash paid during the period for:
                       
     Interest
  $ -     $ -     $ 1,371  
                         
NON-CASH SUPPLEMENTAL INFORMATION:
                       
  Stock issued for services rendered
  $ 330,000     $ 63,750     $ 491,250  
  Stock issued for penalty shares for the amendment of the OID Notes
  $ -     $ -     $ 273,000  
  Stock issued for payment of interest
  $ 10,000     $ -     $ 10,000  
  Stock issued in conversion of OID Notes
  $ -     $ -     $ 260,000  
  Warrants issued for services rendered
  $ -     $ -     $ 94,491  
  Amortization of original issue discount and debt discount
  $ -     $ 554,181     $ 2,082,830  



 
MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 

 

 
Note 1 – Organization and Nature of Business
 

 
Nature of Business
 
The unaudited financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes.  Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  It is suggested that these financial statements be read in conjunction with the December 31, 2011 Form 10-K filed with the SEC, including the audited financial statements and the accompanying notes thereto.  While management believes the procedures followed in preparing these financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.
 
These unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.
 
Magnolia Solar Corporation (the “Registrant”) through its wholly owned subsidiary, Magnolia Solar, Inc. (“Magnolia Solar” and together with the Registrant, “we,” “our,” “us,” or the “Company”) is a development stage company focused on developing and commercializing thin film solar cell technologies that employ nanostructured materials and designs.

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

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

During 2011, the Company filed a series of U.S. utility patent and international applications relating to the technologies under development.


MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 

 

 
Note 1 – Organization and Nature of Business (continued)
 

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

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

Going Concern
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business.  The Company has been generating revenues from various development contracts with governmental agencies, however the Company has generated losses totaling $478,147 and $818,402 for the six months ended June 30, 2012 and 2011, respectively, and $4,478,455 since January 8, 2008 (Inception). While the Company raised funds in a private placement that it consummated in 2009 (raising $990,000 in $2,660,000 of Original Issue Discount Senior Secured Convertible Promissory Notes (the “2009 Notes”)), at June 30, 2012 and December 31, 2011, it had cash of $194,886 and $255,862, respectively, and will need to raise additional funds to carry out its business plan.

The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations.  The Company has had limited operating history to date.


MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 

 
Note 1 – Organization and Nature of Business (continued)
 

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

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

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

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




MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 


Note 2 - Summary of Significant Accounting Policies
 
Development Stage Company
The Company is considered to be in the development stage as defined in ASC 915, “Accounting and Reporting by Development Stage Enterprises.” The Company has devoted substantially all of its efforts to the development of their thin film solar cell technology in the development contracts with governmental agencies they have entered into, corporate formation and the raising of capital.  The Company has generated revenues from agreements entered into in 2011 that are for the development of their products and not the sales of their products.  These contracts are one-time contracts that support the Company's development.  The Company anticipates emerging from the development stage in 2013 upon completion of the development of their products.
 
Basis of Accounting
The financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles.
 
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 of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.
 
Accounts Receivable
For financial reporting, current earnings are charged and an allowance is credited with a provision for doubtful accounts based on experience.  Accounts deemed uncollectible are charged against this allowance.  Receivables are reported on the balance sheet net of such allowance.  The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.  The Company believes no allowance for doubtful accounts is necessary at June 30, 2012.  The Company does not charge interest on past due accounts.

Property and Equipment
Property and equipment are stated at cost and are depreciated on a straight-line basis over their estimated useful lives.  Additions, renewals, and betterments, unless of a minor amount, are capitalized.  Expenditures for maintenance and repairs are charged to expense as incurred.
 
Deferred Financing Fees
The costs incurred in connection with obtaining debt financing will be capitalized as deferred financing costs and amortized using the effective interest method over the term of the debt.


MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 

 

Note 2 - Summary of Significant Accounting Policies (continued)
 
Impairment of Long-Lived Assets
The Company reviews their recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment.  The assessment for potential impairment will be based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis.  If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets.  Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell.  The Company’s management has determined that the fair value of long-lived assets exceeds the book value and thus no impairment charge is necessary as of June 30, 2012.

Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments.  The Company does not utilize derivative instruments.
 
Income Taxes
The Company accounts for income taxes utilizing the liability method of accounting.  Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse.  Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.

Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents.

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

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



MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 


Note 2 - Summary of Significant Accounting Policies (continued)

Loss Per Share of Common Stock
Basic net loss per common share is computed using the weighted average number of common shares outstanding.  Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants.  Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented.  The following is a reconciliation of the computation for basic and diluted EPS:
 
   
June 30,
   
June 30,
 
   
2012
   
2011
 
Net loss
  $ ( 478,147 )   $ (818,402 )
                 
Weighted-average common shares
               
outstanding (Basic)
    26,799,408       24,065,635  
                 
Weighted-average common stock
               
Equivalents
               
Stock options
    -       -  
Warrants
     3,785,300       3,216,428  
                 
Weighted-average common shares
               
outstanding (Diluted)
    30,584,708       27,282,063  
 
Uncertainty in Income Taxes
The Company follows ASC 740-10, “Accounting for Uncertainty in Income Taxes.” This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006.  Management has adopted ASC 740-10 for 2008, and they evaluate their tax positions on an annual basis, and has determined that as of June 30, 2012, no additional accrual for income taxes is necessary.

Recently Issued Accounting Standards
In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". FASB ASU 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820 resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.
 


MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012

 
Note 2 - Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Standards (continued)
In June 2011, FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income", which amends the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective for the Company beginning October 1, 2012, with early adoption permitted. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position
 
In September 2011, FASB issued ASU 2011-08, "Testing Goodwill for Impairment", which amended goodwill impairment guidance to provide an option for entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the Company’s results of operations, cash flows or financial position.
 
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
 

 
MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 


Note 3 - Stockholders’ Equity

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

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

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

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

On March 10, 2010, the Company issued 75,000 shares of common stock at its fair value price ($0.90 per share) for legal services resulting in a value of $67,500.

On November 22, 2010 the Company issued 25,000 shares of common stock in at its fair value price ($0.60 per share) for consulting services in the value of $15,000.

On February 10, 2011 the Company issued 50,000 shares of common stock at its fair value price ($0.37 per share) for consulting services for a value of $18,500.

In April 2011, the Company issued 250,000 shares of common stock at its fair value price ($0.181 per share) for consulting services for a value of $45,250.

On October 11, 2011, the Company issued 100,000 shares of common stock at its fair value price ($0.15 per share) for consulting services for a value of $15,000.

On December 29, 2011, the Company issued 1,040,000 shares upon conversion of the aggregate principal amount of $260,000 of 2009 Notes.  The Company further issued 1,300,000 shares of common stock at its fair value price ($0.21) in connection with the amendment of the 2009 Notes for a value of $273,000.

In April 2012, the Company issued 230,000 shares of common stock at its contract price for consulting services for a value of $230,000.
 
In May 2012, the Company issued 109,162 shares of common stock at its fair value price ($0.09 per share) in lieu of interest payment for a value of $10,000.

In June 2012, the Company issued 100,000 shares of common stock at its contract price for consulting services for a value of $100,000
 
 
MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 


Note 3 - Stockholders’ Equity (continued)

As of June 30, 2012, the Company had 27,109,162 shares issued and outstanding.

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

On August 15, 2011, the Company issued 400,000 warrants for public relations services. The warrants vest immediately, and are for a term of 5 years with a strike price of $0.50 per share. The warrants have been valued at $59,534 and are reflected in the consolidated financial statements for the six months ended June 30, 2012.

As of June 30, 2012, the following warrants are outstanding:
 
Issued – in the 26.6 units
    2,660,000     $ 0.50  
Issued – to Placement Agent
    725,300     $ 0.50  
Balance – December 31, 2009
    3,385,300     $ 0.50  
Balance – December 31, 2010
    3,385,300     $ 0.50  
Issued – for public relations
    400,000     $ 0.50  
Balance December 31, 2011
    3,785,300     $ 0.50  
Balance June 30, 2012
    3,785,300     $ 0.50  
 
Note 4 - Property and Equipment
 
Property and equipment consisted of the following at June 30, 2012 and December 31, 2011:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Office equipment and computers
  $ 6,106     $ 6,106  
Furniture and fixtures
    2,182       2,182  
      8,288       8,288  
Accumulated depreciation
    (5,378 )     (4,204 )
    $ 2,910     $ 4,084  
 
The Company incurred $1,174 and $1,175, respectively, in depreciation expense for each of the six months ended June 30, 2012 and 2011.
 


MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 


Note 5 - Deferred Financing Costs
 
The Company incurred financing costs of $609,776 in connection with the 2009 Private Placement.  These costs were capitalized and are charged to amortization expense over the life of the promissory notes.  Amortization expense for the six months ended June 30, 2012 and 2011 was $0 and $162,245, respectively.  As of June 30, 2012, the deferred financing fees are fully amortized.

Note 6 - License Agreement with Related Party

The Company has entered into a 10-year, renewable, exclusive license with Magnolia Optical Technologies, Inc. (“Magnolia Optical”) on April 30, 2008 for the exclusive rights of the technology related to the application of Optical’s solar cell technology.  Magnolia Optical shares common ownership with the Company.
 
The Company is amortizing the license fee of $356,500 over the 120 month term of the Agreement.  Accumulated amortization as of June 30, 2012 was $148,542.  Amortization expense for each of the six months ended June 30, 2012 and 2011 was $17,825.  The Company’s management has determined that the fair value of the license exceeds the book value and thus no further impairment or amortization is necessary as of June 30, 2012.

Note 7 – Original Issue Discount Senior Secured Convertible Promissory Note

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

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


 
MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 


Note 7 – Original Issue Discount Senior Secured Convertible Promissory Note (continued)
 
Amended Notes
On December 29, 2011, the Company entered into amendment agreements with holders of the 2009 Notes and 2009 Warrants.  Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $260,000 were converted into an aggregate of 1,040,000 shares of common stock of the Company at an adjusted conversion price of $0.25 per share, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2011 to December 31, 2012 and 2009 Notes in the aggregate principal amount of the remaining $400,000 were amended to extend the maturity date from December 31, 2011 to December 31, 2013, (iii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to adjust the conversion price of such notes from $1.00 per share to $0.25 per share, (iv) 2009 Notes in the aggregate principal amount of $400,000 were amended to provide that such notes shall, from January 1, 2012 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, (v) an aggregate of 1,300,000 shares of common stock of the Company were issued to certain holders of the 2009 Notes. As of June 30, 2012, the Company issued 109,162 shares of its common stock in lieu of interest payment of an aggregate of $10,000 relating to the 2009 Notes in the aggregate principal amount of $400,000 and accrued interest accrued interest expense of $10,000 relating to the 2009 Notes in the aggregate principal amount of $400,000 will be paid by the issuance of 108,663 shares of the Company’s common stock.
 
As of June 30, 2012, the entire $2,400,000 balance of the amended 2009 Notes remains outstanding.  In the transaction, the Company recognized a discount of $1,670,000 which was amortized over the original life of the 2009 Notes.  The discount represented the original issue discount. In addition, the Company determined that the value of the warrants in the transaction of $412,830 as a discount to the 2009 Notes.  This discount was being amortized as well over the original life of the 2009 Notes.  The net value of the 2009 Notes of $2,400,000 is included in the consolidated balance sheet at June 30, 2012.  As of June 30, 2012, $2,000,000 of the 2009 Notes are classified as a current liability and $400,000 as a long-term liability. The modifications made to the debt instruments, did not constitute a material modification under ASC 470-50. The Company recorded the value of the shares as an expense in the consolidated statements of operations for the year ended December 31, 2011.
 

 
MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 

 
Note 8 – Provision for Income Taxes
 
Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities.  Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return.  Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.

As of June 30, 2012, there is no provision for income taxes, current or deferred.
 
   
June 30, 2012
 
Net operating losses
  $ 721,659  
Valuation allowance
    (721,659 )
    $ -  
 
At June 30, 2012, the Company had a net operating loss carry forward in the amount of $2,122,525, available to offset future taxable income through 2032.  The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the years ended June 30, 2012 is summarized below.
 
       
       
Federal statutory rate
    (34.0 )%
State income taxes, net of federal
    0.0  
Valuation allowance
    34.0  
      0 %

 
 
MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 


Note 9 – Commitments and Contingencies
 
Office Lease

The Company leases office space at two locations that expire between August 30, 2012 and January 31, 2013.  Rent expense for the Company’s facilities for the years ended June 30, 2012 and 2011 totaled $8,603 and $8,682, respectively.

The future minimum lease payments due under the above mentioned non-cancelable lease agreements are as follows:
 
Year ending December 31,
     
       
2012
  $ 7,382  
2013
    1,105  
    $ 8,487  
 
Contract Related Fees
 
As part of the contract to develop its products, the Company has agreed to pay the contractor 1.5% of future New York state manufactured sales, and 5% of future non-New York state manufactured sales until the entire funds paid by the contractor have been repaid, or 15 years, whichever comes first.  As of June 30, 2012 the Company has $1,022,482 of contract related expenses, all of which will be owed to the contractor, contingent upon the sale of the Company’s product.
 

MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 
 
Note 10 - Concentration of Credit Risk
 
The Company maintains its cash in one bank deposit account, which at times may exceed the federally insured limits of $250,000 that exist through December 31, 2013.  At June 30, 2012, the Company did not have any uninsured deposits.
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable.  The Company extends credit based on the customers’ financial conditions.  The Company does not require collateral or other security to support customer receivables.  Credit losses, when realized, have been within the range of management’s expectations.  To further reduce credit risk associated with accounts receivable, the Company performs periodic credit evaluations of its customers.

Concentrations in Accounts Receivable
 
June 30, 2012
   
June 30, 2011
 
Customer A
    70 %     100 %
Customer B
    30 %     -  
 
Concentrations in Revenue
 
June 30, 2012
   
June 30, 2011
 
Customer A
    63 %     -  
Customer B
    37 %     68 %
Customer C
    -       16 %
 
Note 11 - Fair Value Measurements
 
The Company adopted certain provisions of ASC Topic 820.  ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements.  ASC 820’s valuation techniques are based on observable and unobservable inputs.  Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions.  ASC 820 classifies these inputs into the following hierarchy:

 
Level 1
Quoted prices in active markets for identical assets or liabilities.  The Company's Level 1 assets consist of cash and cash equivalents.

 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 
 
MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 

 
Note 11 - Fair Value Measurements (continued)
 
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
 
June 30, 2012
                       
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Cash
    194,886       -       -       194,886  
                                 
Total assets
    194,886       -       -       194,886  
                                 
Original Issue Discount
                               
Senior Secured Convertible
                               
Promissory Notes
    -       -       2,400,000       2,400,000  
                                 
Total liabilities
    -       -       2,400,000       2,400,000  
                                 
                                 
December 31, 2011
                               
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                                 
Cash
    255,862       -       -       255,862  
                                 
Total assets
    255,862       -       -       255,862  
                                 
Original Issue Discount
                               
Senior Secured Convertible
                               
Promissory Notes
    -       -       2,400,000       2,400,000  
                                 
Total liabilities
    -       -       2,400,000       2,400,000  
 
MAGNOLIA SOLAR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2012
 


Note 11 - Fair Value Measurements (continued)
 
   
Original Issue Discount
 
    Senior Secured Convertible  
   
Promissory Notes
 
       
Balance, January 1, 2011
  $ 1,459,209  
         
Realized gains/(losses)
    -  
         
Unrealized gains/(losses) relating to
       
instruments still held at the reporting date
    -  
         
Purchases, sales, issuances and settlements, net
    -  
         
Discount on notes
    -  
         
Amortization of discount on notes
    1,200,791  
         
Conversion of notes to common stock
    (260,000 )
         
Balance, December 31, 2011
  $ 2,400,000  
         
Realized gains/(losses)
    -  
         
Unrealized gains/(losses) relating to
       
instruments still held at the reporting date
    -  
         
Purchases, sales, issuances and settlements, net
    -  
         
Discount on notes
    -  
         
Amortization of discount on notes
     -  
         
Balance, June 30, 2012
  $ 2,400,000  
 
  Note 12 – Subsequent Events

On July 23, 2012, the Company issued 100,000 shares of common stock for consulting services.

On July 23, 2012, the Company issued 108,663 shares of common stock for payment of interest in lieu of cash.

 
 
Forward-Looking Statements
 
The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
 
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
 
Overview
 
We are a development stage company focused on developing and commercializing thin film solar cell technologies that employ nanostructured materials and designs. We are pioneering the development of thin film, high efficiency solar cells for applications such as power generation for electrical grids as well as for local applications, including lighting, heating, traffic control, irrigation, water distillation, and other residential, agricultural and commercial uses.

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

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

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
 
Revenues

Currently we are in our development stage and have recorded $171,001 of revenue for the three months ended June 30, 2012 compared to $171,034 of revenue for the three months ended June 30, 2011, a decrease of $33 or 0.02%. We anticipate emerging from the development stage in fiscal 2013. The revenue recorded is from research and development grants or contracts to develop solar cells using Magnolia’s technology.

Cost of Revenues

Cost of revenues for the three months ended June 30, 2012 were $115,256 as compared to $110,174 for the three months ended June 30, 2011, representing an increase of $5,082, or 4.61%. Cost of revenues were comprised of direct labor, direct travel, materials, and subcontracts for the solar cell development. The increase in cost of revenues for this period was attributable to an increase in subcontracts. 
 
Operating Expenses

Indirect and Administrative Labor

Indirect and administrative labor expense for the three months ended June 30, 2012 was $43,805 as compared to $68,104 for the three months ended June 30, 2011, a decrease of $24,299 or 35.68%. Indirect labor and benefits were comprised of wages for the administrative staff, payroll taxes, health insurance, disability insurance, indirect travel, other administrative expenses and provision for vacation time. The decrease in indirect and administrative expenses for this period was primarily attributable to a decrease in indirect labor, holiday pay, and health insurance costs.

Professional Fees

Professional fees for the three months ended June 30, 2012 were $366,896 as compared to $75,366 for the three months ended June 30, 2011, representing an increase of $291,530, or 386.81%.  Professional fees were comprised of accounting, business services, public relations, audit, and legal fees as well as the value of shares issued for services rendered of $330,000. The increase in professional fees for this period was attributable primarily to the value of the shares issued for services offset by the decrease in cost of patent filings, legal and accounting services.
 
Depreciation and Amortization Expense

Depreciation and amortization expense for the three months ended June 30, 2012 were $9,500 as compared to $93,748 for the three months ended June 30, 2011, representing a decrease of $84,248 or 89.87%. Depreciation and amortization expense was comprised of amortization of the license fee paid for the technology license, amortization of the debt issue, and depreciation on the property and equipment. The decrease in depreciation and amortization expense for this period was attributable to decrease of amortization of debt expense.

General and Administrative

General and administrative expense for the three months ended June 30, 2012 was $11,210 as compared to $14,956 for the three months ended June 30, 2011, a decrease of $3,746 or 25.05%. General and administrative expense was comprised of expenses for office lease, computer, office supplies, dues and subscriptions, worker’s compensation, disability insurance, printing, telephone, business meals, repairs and maintenance, public relations, advertising, state income taxes, business gifts and other miscellaneous items. The decrease in general and administrative expense for this period was primarily attributable to a reduction in public relations expense, office supplies expense, and telephone expense.

Interest Expense

Interest expense for the three months ended June 30, 2012 was $9,946 as compared to $287,771 for the three months ended June 30, 2011, representing a decrease of $277,825, or 96.54%. Interest expense was comprised of the amortization of the debt discount. The decrease in interest expense during this period was attributable to a reduction in the amortization of the interest expense on the original issue discount on the 2009 note. 

Net Loss

Our net loss for the three months ended June 30, 2012 was $385,612, as compared to $479,085 for the three months ended June 30, 2011, representing a decrease of $93,473, or 19.51%.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
 
Revenues

Currently we are in our development stage and have recorded $287,731 of revenue for the six months ended June 30, 2012 compared to $372,588 of revenue for the six months ended June 30, 2011, a decrease of $84,857 or 22.78%. We anticipate emerging from the development stage in fiscal 2013. The revenue recorded is from research and development grants or contracts to develop solar cells using Magnolia’s technology.

Cost of Revenues

Cost of revenues for the six months ended June 30, 2012 were $187,021 as compared to $189,187 for the six months ended June 30, 2011, representing a decrease of $2,166, or 1.14%. Cost of revenues were comprised of direct labor, direct travel, materials, and subcontracts for the solar cell development. The decrease in cost of revenues for this period was attributable to reduction in direct labor.  


Operating Expenses

Indirect and Administrative Labor

Indirect and administrative labor expense for the six months ended June 30, 2012 was $89,066 as compared to $105,754 for the six months ended June 30, 2011, a decrease of $16,688 or 15.78%. Indirect labor and benefits were comprised of wages for the administrative staff, payroll taxes, health insurance, disability insurance, indirect travel, other administrative expenses and provision for vacation time. The decrease in indirect and administrative expenses for this period was primarily attributable to a decrease in indirect labor, holiday pay, paid time off cost, and health insurance costs.

Professional Fees

Professional fees for the six months ended June 30, 2012 were $424,908 as compared to $133,302 for the six months ended June 30, 2011, representing an increase of $291,606, or 218.76%.  Professional fees were comprised of accounting, business services, public relations, audit, and legal fees as well as the value of shares issued for services rendered of $330,000. The increase in professional fees for this period was attributable primarily to the value of the shares issued for services rendered offset by the decrease in cost of business services.
 
Depreciation and Amortization Expense

Depreciation and amortization expense for the six months ended June 30, 2012 were $18,999 as compared to $181,243 for the six months ended June 30, 2011, representing a decrease of $162,244 or 89.52%. Depreciation and amortization expense was comprised of amortization of the license fee paid for the technology license, amortization of the debt issue, and depreciation on the property and equipment. The decrease in depreciation and amortization expense for this period was attributable to decrease of amortization of debt expense.

General and Administrative

General and administrative expense for the six months ended June 30, 2012 was $26,029 as compared to $27,322 for the six months ended June 30, 2011, a decrease of $1,293 or 4.73%. General and administrative expense was comprised of expenses for office lease, computer, office supplies, dues and subscriptions, worker’s compensation, disability insurance, printing, telephone, business meals, repairs and maintenance, public relations, advertising, state income taxes, business gifts and other miscellaneous items. The decrease in general and administrative expense for this period was attributable to a reduction in computer, office supplies and telephone expenses.

Interest Expense

Interest expense for the six months ended June 30, 2012 was $19,855 as compared to $554,182 for the six months ended June 30, 2011, representing a decrease of $534,327, or 96.42%. Interest expense was comprised of the amortization of the debt discount. The decrease in interest expense during this period was attributable to a reduction in the amortization of the interest expense on the original issue discount on the 2009 note. 

Net Loss

Our net loss for the six months ended June 30, 2012 was $478,147, as compared to $818,402 for the six months ended June 30, 2011, representing a decrease of $340,255, or 41.58%.

Liquidity and Capital Resources

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

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

At June 30, 2012 and December 31, 2011 we had cash of $194,886 and $255,862 respectively and working capital deficit of $1,931,276 and $1,812,128, respectively. The decrease in working capital was due to increase in the current portion of the original issue discount note. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2011 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.   Our ability to continue as a going concern is dependent upon raising capital from financing transactions.

 
Net cash used in operating activities was $60,976 for the six months ended June 30, 2012, as compared to $84,993 for the six months ended June 30, 2011. The reduction in net cash used in operating activities was attributable to increase in accounts payable and decrease in accounts receivable.

Net cash used in investing activities was $0 for the six months ended June 30, 2012, as compared to $0 for the six months ended June 30, 2011. There was no cash used in investing activities because we did not add to plant and equipment.

Net cash flows provided by financing activities was $0 for the six months ended June 30, 2012, as compared to $0 for the six months ended June 30, 2011. There were no capital raising transactions during the reporting period.

Since our inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations in the future. In addition, we have Original Issue Discount Notes in the aggregate principal of $2,000,000 that mature on December 31, 2012 and a further $400,000 that matures on December 31, 2013. Such indebtedness is secured by substantially all of our assets. If we were to default on our indebtedness, then holders of the notes may foreclose on the debt and seize our assets which may force us to suspend or cease operations altogether.

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

Off-Balance Sheet Arrangements

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


 


 
N/A.
 
 
Evaluation of Disclosure Controls and Procedures . Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
 
Changes in Internal Control Over Financial Reporting. During the most recent quarter ended June 30, 2012, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

 




 
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
 
N/A.
 
 
On April 20, 2012, the Company issued 30,000 shares of common stock for consulting services.

On April 24, 2012, the Company issued 200,000 shares of common stock for consulting services.
 
On May 4, 2012, the Company issued 109,162 shares of common stock for payment of interest in lieu of cash.

On June 12, 2012, the Company issued 100,000 shares of common stock for consulting services.

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

 
None.
 

           N/A.
 
 
None.
 
 


 

 
 

Exhibit
Number
 
Description of Exhibit
     
 
 
 
 
101
 
The following materials from Magnolia Solar Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Changes in Stockholders’ Equity (Deficit), (iv) the Consolidated Statements of Cash Flow, and (iv) Notes to Consolidated Financial Statements tagged as blocks of text.
 
 

 


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
       
 
MAGNOLIA SOLAR CORPORATION
 
 
       
Date: August 9, 2012
By:  
/s/ Dr. Ashok K. Sood
 
 
Dr. Ashok K. Sood
President, Chief Executive Officer and Director (Principal Executive Officer)
 
     
 
       
     
       
Date: August 9, 2012
By:  
/s/ Dr.  Yash R. Puri
 
 
Dr. Yash R. Puri
Executive Vice-President, Chief Financial Officer and Director (Principal Financial Officer)
 

 
 
 
 
 
 
 
 
 
 
 
 

 
31


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XOTC:MGLT Quarterly Report 10-Q Filing - 6/30/2012
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