ACQUIRED SALES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) As used in this 10Q, references to the "Company," "Acquires Sales," "we," "our" or "us" refer to Acquired Sales Corp., unless the context otherwise indicates.

On November 4, 2010, Acquired Sales Corp. ("AQSP") entered into an agreement with Cogility Software Corporation ("Cogility") that was closed on September 29, 2011, whereby Cogility was merged with and into a newly-formed subsidiary of Acquired Sales. To effect the merger, Cogility shareholders owning 100% of the 11,530,493 Cogility common shares outstanding received 2,175,564 Acquired Sales common shares, or one Acquired Sales common share for each 5.3 Cogility common shares outstanding. Acquired Sales reverse split its common shares outstanding on a 1-for-20 basis, which results in the 5,832,482 Acquired Sales pre-split common shares outstanding before the merger becoming 291,760 common shares. In addition, Cogility had stock options outstanding that would have permitted the holders thereof to purchase 5,724,666 Cogility common shares at prices ranging from $0.001 to $1.40 per share. In the merger transaction, the Cogility option holders exchange these stock options for 1,080,126 Acquired Sales stock options exercisable at prices ranging from $0.001 to $5.00 per share.

The Cogility shareholders received 88.2% of the common shares outstanding after the merger and the shareholders and management of Cogility gained ownership and operating control of the combined company after the merger. Accordingly, Cogility was considered the accounting acquirer under current accounting guidance and the merger was recognized as a recapitalization of Cogility. The results of operations prior to the merger are those of Cogility, restated on a retroactive basis for all periods presented for the effects of the 5.3-for-1 reverse stock split. The exchange of the stock options was considered to be part of the recapitalization of Cogility and was not a modification of the Cogility stock options.

On February 13, 2012 (the "Acquisition Date"), pursuant to the terms and conditions of the Agreement and Plan of Merger dated as of January 12, 2012 ("the "Merger Agreement") among Defense & Security Technology Group, Inc.

("DSTG"), a Virginia corporation and Acquired Sales Corp. ("AQSP), a Nevada corporation and a newly-formed, wholly-owned subsidiary of AQSP, Acquired Sales Corp. Merger Sub, Inc., a Virginia corporation ("Merger Sub"), AQSP completed its acquisition of DSTG, which held no material assets other than its pipeline of future work and the expertise of its sole shareholder, through the merger of Merger Sub with and into DSTG, with DSTG as the surviving corporation (the "Merger"). Upon completion of the Merger, the separate corporate existence of Merger Sub ceased and DSTG became a wholly-owned subsidiary of AQSP.

As part of the Merger Agreement the 100 shares of DSTG stock were converted into 100,000 shares of AQSP shares at a price of $3.18 per share. AQSP issued options to purchase 300,000 shares of newly issued AQSP stock vesting immediately and exercisable at any time on or before the fifth anniversary of the Closing Date at an exercise price of $3.18 per share. AQSP also issued additional options to purchase 100,000 shares of newly issued AQSP stock vesting immediately and exercisable at any time on or before the 21st full calendar quarter following the Closing Date at an exercise price of $8.00 per share. The total consideration paid by AQSP in connection with the Merger, totaled $679,302.

At September 30, 2012 our current liabilities exceeded our current assets by $2,508,591 and Acquired Sales Corp. had a capital deficiency of $2,874,294 accordingly, Acquired Sales Corp. was insolvent at September 30, 2012. The Company completed several contracts during the nine months ended September 30, 2012, for total revenue net of costs of $894,879. The Company had one significant contract in process at September 30, 2012 for estimated billings of $1,000,000. The Company has billed approximately $300,000 on this contract through September 30, 2012 and expects the remainder to be realized through the first quarter of 2013. In addition, subsequent to September 30, 2012, the Company signed two more contracts for a total estimated billing of $640,000. However, the Company continues to be insolvent. The current contracts closed and in process are not substantial enough to alleviate the Company's lack of cash flow. Acquired Sales Corp. currently has operating liabilities that it cannot pay and without an additional infusion of cash it is unlikely that the Company will be able to continue as a going concern.

In addition, without a significant capital infusion it will be very difficult for the Company to perform on any new material contracts or multiple simultaneous contracts, as the Company does not have the necessary infrastructure in place due to the lack of cash flow. Significant lead time is necessary to hire and train employees on the Cogility Software platform. In addition, material capital expenditures are needed to enable the Company to perform under a new single material contract or multiple simultaneous contracts.

2 -------------------------------------------------------------------------------- Table of Contents During the nine months ended September 30, 2012, the Company received $797,000 in loans from related parties for working capital needs. Without additional capital or the generation of profits through sales, there can be no assurance whatsoever that Acquired Sales Corp. will be able to overcome its current financial problems, and bankruptcy is a distinct possibility.

This Management's Discussion and Analysis of Financial Condition and Results ("MD&A") section discusses our results of operations, liquidity and financial condition, contractual relationships and certain factors that may affect our future results. You should read this MD&A in conjunction with our financial statements and accompanying notes included for Acquired Sales Corp.

Forward-Looking Statements This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report, and the"Risk Factors" included in our Form 10-K filed with the U.S. Securities and Exchange Commission on March 30, 2012 (the "Risk Factors").

Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources.

Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include "the Risk Factors" included in herein, such as those relating to our present condition of insolvency with risk of bankruptcy, failure of our marketing and sales activities to obtain sufficient contracts during the past few months, vigorous competition in the software industry, dependence on existing management, leverage and debt that cannot be served at current income levels, budgetary constraints affecting the U.S. defense and intelligence communities, negative domestic and global economic conditions, and other Risk Factors.

Overview Acquired Sales Corp. is incorporated under the laws of the State of Nevada.

Acquired Sales Corp. through its wholly owned subsidiary, Cogility Software Corporation ("Cogility"), has developed software technology that is solving mission-critical problems facing the U.S. defense and intelligence communities and many corporations today. Our software technology allows our customers to quickly access and analyzes the avalanche of data being generated by disparate sources and stored in many different databases. Cogility provides Model Driven Complex Event Processing software technology for the U.S. defense and intelligence communities and private sector corporations with complex information management requirements. Cogility addresses the pressing organizational need for speed, agility and competitive differentiation.

Cogility's website can be reviewed at www.Cogility.com.

Cogility's software technology is so uniquely capable, that during the past two years -- without any advertising or promotional campaigns -- Cogility has gained significant traction within the U.S. defense and intelligence communities.

However, the Company has continued to realize operating losses and negative working capital because of its inability to generate a consistent and significant revenue stream. The company completed several contracts during the nine months ended September 30, 2012 for total revenue net of costs of $894,879. The Company had one significant contract in process at September 30, 2012 for estimated billings of $1,000,000. The Company has billed approximately $300,000 on this contract through September 30, 2012 and expects the remainder to be realized through the first quarter of 2013. In addition the Company signed two new contracts subsequent to September 30, 2012 for an estimated total billing of $640,000. The current contracts closed and in process were not substantial enough to alleviate the Company's lack of cash flow.

3 -------------------------------------------------------------------------------- Table of Contents Because of the complex and sophisticated nature of Cogility's applications, the Company has found that there is a significant lead time in the sales cycle because Cogility's product requires substantial education of, and conceptual buy-in from, a potential customer's executive operations and information technology professionals. This long sales cycle adversely affects the Company, in regards to closing sales to the government and commercial markets.

Potential customers frequently require us to build demonstration systems to assist the potential customers' executive, operations and information technology professionals in understanding how Cogility's software might change their business processes and how the software might integrate with their existing systems. These factors add significant costs and time to complete a potential sale The Company is new to the government sector and we do not yet have the experience or qualifications to act as a prime contractor in the federal contracting arena, and as a result, we must expend considerable time and effort trying to find organizations or companies that will act as the prime contractor or partner on Cogility's projects. The prime contractor collects and distributes funding and communicates with the end user. This adds risk and uncertainty, as we lose control over the projects and do not typically have direct communication with the customer. This inability to act as the prime contractor also can delay the closing of potential contracts and further lengthen the sales cycle.

All of the above factors have materially affected the Company's business. Our lack of any substantial revenue has caused the Company to continue to be insolvent. We currently have operating liabilities that we cannot pay and without an additional infusion of cash it is unlikely that the Company will be able to continue as a going concern. There can be no assurance whatsoever that the Company will be able to overcome its current financial problems and bankruptcy is a distinct possibility unless additional capital is raised promptly.

In addition to our focus on the government sector, we continue to market our product to the commercial sector. We believe that some of our commercial projects will result in the creation of software work product that can be re-sold multiple times within the same industries. We are currently exploring commercial projects that we believe may have such re-sale potential.

On February 13, 2012 Acquired Sales Corp. closed an Agreement and Plan of Merger with Defense & Security Technology Group, Inc. (DSTG), a Virginia corporation.

Management believes the acquisition of DSTG will expand the opportunities for Cogility software solutions to assist clients in making accurate and cost-effective decisions on programs that often involve Big Data management or Complex Event Processing analytics. DSTG strategic consulting services are tightly integrated with Cogility rapid modeling software and will provide seamless enterprise solutions available to our clients.

However, there can be no assurance whatsoever that we will be able to overcome our current financial problems and bankruptcy is still a distinct possibility unless additional capital is raised promptly.

Liquidity and Capital Resources The following table summarizes the Company's cash and cash equivalents, working capital and long-term debt as of September 30, 2012 and December 31, 2011, as well as cash flows for the nine months ended September 30, 2012 and 2011.

4 -------------------------------------------------------------------------------- Table of Contents September 30, December 31, 2012 2011 Cash and cash equivalents $ 110,227 $ 65,684 Working capital (2,508,591 ) (2,170,479 ) Long-term debt 816,213 790,775 For the Nine Months Ended September 30, 2012 2011 Cash used in operating activities $ (699,609 ) $ (1,360,485 ) Cash provided by ( used in ) investing activities 22,127 (18,707 ) Cash provided by financing activities 722,025 1,100,000 At September 30, 2012 the Company had cash of $110,227 and $257,884 of accounts receivable. Total current assets at September 30, 2012 were $412,133 an amount far below what is necessary to fund operations and fulfill corporate obligations. Current liabilities at September 30, 2012 included $370,224 of accounts payable; $121,711 of accrued liabilities; $251,357 of billings in excess of costs on uncompleted contracts; $130,070 of notes payable; $1,348,000 of notes payable to related parties and $695,317 of accrued employee compensation. Billings in excess of costs on uncompleted contracts represent deferred revenues net of costs on contracts that are currently in process and accounted for under the completed contract method of accounting. Notes payable and notes payable to related party represents debt incurred by the Company to fund operating activities. Amounts owed to employees represent deferred payroll and payroll taxes, commissions and reimbursable expenses.

During the year ended December 31, 2011, the Company issued several promissory notes payable to Acquired Sales Corp. in the aggregate principal amount of $845,000 in exchange for $625,000 in cash, and the assumption of a $200,000 note payable by the Company to an entity related to an officer of the Company and a $20,000 note receivable from Cortez. The notes payable bore interest at 5% per annum payable quarterly beginning March 31, 2011, were due December 31, 2014 and were secured by all of the assets of the Company.

On September 29, 2011, Cogility exchanged $845,000 of notes payable to Acquired Sales and $10,534 of related accrued interest for $448,000 of notes payable to related parties and $520,000 of notes payable to third parties. The transaction was evaluated to determine whether it qualified as an extinguishment of debt under current accounting guidance. Under that guidance, an exchange of debt instruments with substantially different terms is a debt extinguishment. Debt is deemed to have substantially different terms if the present value of the cash flows under the terms of the new debt is a least 10% different from the present value of the remaining cash flows under the terms of the original debt instruments. The present value of the cash flows did not change by 10%; therefore, the new debt was not substantially different from the original debt and the transaction was recognized as an exchange of debt rather than an extinguishment of debt.

The new debt was recorded at the carrying amount of original debt and accrued interest on the date of the exchange of $855,534 by adjusting the effective interest rate applied to the future payments due under the terms of the notes payable and, as a result, no gain or loss was recognized on the exchange of the liabilities. The resulting discounts and premiums are being amortized over the term of the new notes payable. At September 30, 2012, the carrying amount of the notes payable to related parties was $340,745, net of $34,255 of unamortized discounts and premiums, and the carrying amount of the notes payable to third parties was $475,468, net of $44,532 of unamortized discount.

In addition, during the nine months ended September 30, 2012 the Company issued notes payable in the amounts of $797,000 to related parties to help fund operations.

Despite these borrowings, the Company still has not solved its lack of liquidity and capital resources. Although the Company has closed several contracts during the nine months ended September 30, 2012, these contracts have yet to generate significant cash flow and the Company has had to rely on financing arrangements to fund operations for the first nine months of 2012. There can be no assurance whatsoever that Acquired Sales Corp. will be able to permanently overcome its financial problems. Unless and until Acquired Sales Corp. is able to permanently overcome its financial problems, Acquired Sales Corp. will remain at risk of going bankrupt.

5 -------------------------------------------------------------------------------- Table of Contents Comparison of September 30, 2012 and September 30, 2011 The Company incurred a net loss of $1,803,488 for the nine months ended September 30, 2012 mainly due to the revenues generated for the period less than an amount necessary to cover fixed overhead, interest expense and stock option and stock warrant expense. Under the completed contract method of accounting revenues for contract in progress are deferred net of costs, until such time the contract is completed. The nature of the Company's operations makes it difficult to scale back costs in periods of reduced revenue. The Company's labor force is our largest cost, the employees are specifically trained and extremely difficult to replace. In addition as the Company continues to rely on debt to help fund operations the cost of the debt continues to rise. At September 30, 2012, the Company had current liabilities in excess of current assets of $2,508,591, an accumulated deficit of $10,939,525 and a shareholders' deficit of $2,874,294.

The Company utilized cash from operations of $699,609 during the nine months ended September 30, 2012 compared to utilizing cash from operations of $1,360,485 during the nine months ended September 30, 2011. The Company continues to utilize cash from operations because the income generated is not enough to cover the Company's operating expenses.

The Company had net cash provided by investing activities of $22,127, mainly due to the acquisition of cash as part of the DSTG purchase. This is compared to $18,707 of cash used in investing activities for the nine months ended September 30, 2011, mainly for the acquisition of property and equipment.

The Company borrowed $797,000 from related parties during the nine months ended September 30, 2012 for net cash provided by financing activities of $722,025.

This as compared to $1,100,000 of cash provided by financing activities during the nine months ended September 30, 2011.

During the nine months ended September 30, 2012, cash increased by $44,543 leaving the Company with $110,227 in cash at September 30, 2012. This is compared to a $279,192 decrease in cash during the nine months ended September 30, 2011.

The Company incurred a net loss for the nine months ended September 30, 2012 of $1,803,488 as compared to a net loss of $2,490,893 for that same period ended September 30, 2011. The Company closed several contracts in progress during the nine months ended September 30, 2012, which generated revenue of $2,183,307. During the nine months ended September 30, 2011, the Company had several contracts in progress, but was unable to recognize the billings net of costs until such time as those contracts closed.

The Company has one contract in process at September 30, 2012, with anticipated billings of approximately $1,000,000, and subsequent to September 30, 2012 the Company signed two contracts for total estimated revenue of $640,000. However, there can be no assurance whatsoever that the Company will continue to generate significant income in the future. The Company continues to pursue new contracts from both the U.S. defense and intelligence communities and from commercial customers, however, there can be no assurance whatsoever that such effort will be successful or will result in revenues to Acquired Sales Corp. on any particular timetable or in any particular amounts. The Company has a history of losses as evidenced by the accumulated deficit at September 30, 2012 of $10,939,525.

Comparison of the three and nine months ended September 30, 2012 to the three and nine months ended September 30, 2012 The Company through its wholly owned subsidiary enters into contractual arrangements with end-users of its products to sell software licenses, hardware, consulting services and maintenance services, either separately or in various combinations thereof. For each arrangement, revenue is recognized when persuasive evidence of an arrangement exists, the fees to be paid by the customer are fixed or determinable, collection of the fees is probable, and delivery of the product or services has occurred. See additional revenue recognition disclosure under "Critical Accounting Policies." 6 -------------------------------------------------------------------------------- Table of Contents Cost of revenue consists primarily of the cost of hardware and software and the cost of services provided to customers. Cost of services includes direct costs of labor, employee benefits and related travel.

Selling, general and administrative expenses primarily consist of professional fees, salaries and related costs for accounting, administration, finance, human resources, information systems and legal personnel.

Revenue - Revenue was $522,419 and $18,385 for the three months ended September 30, 2012 and 2011, respectively, representing an increase of $504,031, or 2741.5%. Revenue, net of costs, on contracts in progress is deferred until such time the contracts are completed. The Company closed one contract in progress during the three months ended September 30, 2012 and as such recognized the revenue net of costs at that time. At September 30, 2012, we had one contract in progress whose billings in excess of cost are being deferred. During the three months ended September 30, 2011 we had not completed any contracts; Revenue consisted of only maintenance and support services.

Revenue was $2,183,307 and $55,160 for the nine months ended September 30, 2012 and 2011, respectively, representing an increase in revenue of $2,128,147, or 3858.1%. Revenue, net of costs, on contracts in progress is deferred until such time the contracts are completed. At September 30, 2012, we had one contract in progress whose billings in excess of cost are being deferred. We closed several contracts during the nine months ended September 30, 2012 and as such recognized the revenue net of costs at that time. During the nine months ended September 30, 2011 we had not completed any contracts; Revenue consisted of only maintenance and support services.

Cost of Revenue - Our cost of services was $489,095 for the three months ended September 30, 2012, compared to $0 for the three months ended September 30, 2011, representing an increase of $489,095 or 100%. Cost of services for the three months ended September 30, 2012, represent direct labor and travel on the contracts completed during the three months then ended.

Our cost of services was $1,288,428 for the nine months ended September 30, 2012, compared to $88 for the nine months ended September 30, 2011, representing an increase of $1,288,340. Costs associated with the contract in process were deferred and will be recognized at such time the contract is completed. Cost of services for the nine months ended September 30, 2012, represent direct labor and travel on contracts completed during the nine months then ended.

The changes with respect to our revenues and our cost of revenue for the three and nine months ended September 30, 2012 and 2011 are summarized as follows: 7 -------------------------------------------------------------------------------- Table of Contents For the Three Months Ended September 30, 2012 2011 Change REVENUE Consulting Services 522,416 - 522,416 Maintenance and support services - 18,385 (18,385 ) Total Revenue $ 522,416 $ 18,385 $ 504,031 COST OF REVENUE Cost of Services 489,095 - 489,095 Total Cost of Revenue 489,095 - 489,095 Gross Profit $ 33,321 $ 18,385 $ 14,936 For the Nine Months Ended September 30, 2012 2011 Change REVENUE Consulting Services 2,128,146 - 2,128,146 Maintenance and support services 55,161 55,160 1 Total Revenue $ 2,183,307 $ 55,160 $ 2,128,147 COST OF REVENUE Cost of Services 1,288,428 88 1,288,340 Total Cost of Revenue 1,288,428 88 1,288,340 Gross Profit $ 894,879 $ 55,072 $ 839,807 Although the preceding table summarizes the net changes with respect to our revenues and our cost of revenue for the three and nine months ended September 30, 2012 and 2011, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

Selling, General and Administrative Expense - Selling, general and administrative expense, including non-cash compensation expense, was $521,317 for the three months ended September 30, 2012, compared to $696,398 for the three months ended September 30, 2011, representing a decrease of $175,081, or 25.1%. The decrease in our selling, general and administrative expense related to an increase in salaries and wages allocable to contracts and recorded in cost of services.

Selling, general and administrative expense, including non-cash compensation expense, was $2,274,274 for the nine months ended September 30, 2012, compared to $2,502,164 for the nine months ended September 30, 2011, representing a decrease of $227,890, or 9.1%. The decrease in our selling, general and administrative expense related to an increase in salaries and wages allocable to contracts and recorded in cost of services, or billings in excess of costs on uncompleted contracts.

Net Loss - We realized a net loss of $630,390 for the three months ended September 30, 2012, compared to a net loss of $694,455 during the three months ended September 30, 2011. The resulting decrease in the net loss of $64,065 or 9.2% was primarily related to an increase in revenue. We may continue to incur losses in the future as contracts close and new contracts are not entered into.

We realized a net loss of $1,803,488 for the nine months ended September 30, 2012, compared to a net loss of $2,490,893 during the nine months ended September 30, 2011. The resulting decrease in the net loss of $687,405 or 27% was primarily related to the increase in revenue recognized on completed contracts. We may continue to incur losses in the future as contracts close and new contracts are not entered into.

8 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies 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, liabilities, revenue, and expenses. Significant estimates include share-based compensation forfeiture rates and the potential outcome of future tax consequences of events that have been recognized for financial reporting purposes. Actual results and outcomes may differ from management's estimates and assumptions.

Accounts Receivable - Accounts receivable are stated at the amount billed to customers, net an allowance for doubtful accounts. The Company evaluates the collectability of the amount receivable from each customer and provides an allowance for those amounts estimated to be uncertain of collection. Accounts determined to be uncollectible are written off against the allowance for doubtful accounts.

Property and Equipment - Property and equipment are recorded at cost less accumulated depreciation. Maintenance, repairs, and minor replacements are charged to expense as incurred. When depreciable assets are retired, sold, traded in or otherwise disposed, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, which are three to five years.

Depreciation expenses for the nine months ended September 30, 2012 and 2011 was $25,516 and $31,184, respectively.

Software Development Costs - Software development costs consist primarily of compensation of development personnel, related overhead incurred to develop new products and upgrade and enhance the Company's current products and fees paid to outside consultants. Software development costs incurred subsequent to the determination of technological feasibility and marketability of a software product are capitalized. Capitalization of costs ceases and amortization of capitalized software development costs commences when the products are available for general release. For the nine months ended September 30, 2012 and 2011, no software development costs were capitalized because the time period and cost incurred between technological feasibility and general release for all software product releases was insignificant.

Revenue Recognition - The Company enters into contractual arrangements with end-users of its products to sell software licenses, hardware, consulting services and maintenance services, either separately or in various combinations thereof. For each arrangement, revenue is recognized when persuasive evidence of an arrangement exists, the fees to be paid by the customer are fixed or determinable, collection of the fees is probable, and delivery of the product or services has occurred. When the Company is the primary obligor or bears the risk of loss, revenue and costs are recorded on a gross basis. When the Company receives a fixed transactional fee, revenue is recorded under the net method based on the net amount retained.

In contractual arrangements where services are essential to the functionality of the software or hardware, or payment of the license fees are dependent upon the performance of the related services, revenue for the software license, hardware and consulting fees are recognized on the completed-contract method when the contract is substantially completed and all related deliverables have been provided to and accepted by the customer. This method is used because the Company is unable to accurately estimate total cost of individual contracts until the contracts are substantially complete. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Claims for additional compensation are recognized during the period such claims are resolved and collected.

Costs of software, hardware and costs incurred in performing the contract services are deferred until the related revenue is recognized. Contract costs include all purchased software and hardware, subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, equipment, and travel costs as well as depreciation on equipment used in performance of the contractual arrangements. Depreciation on administrative assets and selling, general and administrative costs are charged to expense as incurred.

Costs in excess of amounts billed are classified as current assets under the caption Costs in excess of billings on uncompleted contracts. Billings in excess of costs are classified as current liabilities under the caption Billings in excess of costs on uncompleted contracts. Contract retentions are included in accounts receivables.

9 -------------------------------------------------------------------------------- Table of Contents Software Licensing and Hardware Sales: When software licensing and/or hardware functionality are not dependent upon performance of services, the amount of revenue under the arrangement is allocated to the deliverable elements based on prices the Company sells the separate elements, if objectively determinable. If so determinable, the amounts allocated to the software licensing are recognized as revenue at the time of shipment of the software to the customer. Such sales occur when the Company resells third-party software and hardware systems and related peripherals as part of an end-to-end solution to its customers. The Company considers delivery to occur when the product is shipped and title and risk of loss have passed to the customer.

Consulting Services: Consulting services are comprised of consulting, implementation, software installation, data conversion, building interfaces to allow the software to operate in integrated environments, training and applications. Consulting services are sold on a fixed-fee and a time-and-materials basis, with payment normally due upon achievement of specific milestones. Consulting services revenue is recognized under the completed-contract method as described above.

Maintenance and Support Services: Maintenance and support services consist primarily of fees for providing unspecified software upgrades on a when-and-if-available basis and technical support over a specified term, which is typically twelve months. Maintenance revenues are recognized ratably over the term of the related agreement.

Concentration of Significant Customers -At September 30, 2012, accounts receivables from two customers accounted for 95% of total accounts receivable. Revenue from six customers was 89% of total revenue for the nine months ended September 30, 2012. Revenue from two customers totaled 100% of total revenue for the nine months ended September 30, 2011.

Income Taxes - Provisions for income taxes are based on taxes payable or refundable for the current year and deferred income taxes. Deferred income taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and on tax carry forwards.

Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided against deferred income tax assets when it is not more likely than not that the deferred income tax assets will be realized.

Basic and Diluted Loss Per Share - Basic loss per common share is determined by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is calculated by dividing net loss by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. When dilutive, the incremental potential common shares issuable upon exercise of stock options and warrants are determined by the treasury stock method. There were 2,336,981 and 1,117,925 employee stock options and 868,000 and zero warrants outstanding during the nine months ended September 30, 2012 and 2011, respectively, that were excluded from the computation of the diluted loss per share for the three and nine months ended September 30, 2012 and 2011 because their effects would have been anti-dilutive.

Share-Based Compensation Plan - Stock-based compensation to employees and consultants is recognized as a cost of the services received in exchange for an award of equity instruments and is measured based on the grant date fair value of the award or the fair value of the consideration received, whichever is more reliably measureable. Compensation expense is recognized over the period during which service is required to be provided in exchange for the award (the vesting period).

Contractual Cash Obligations and Commercial Commitments The Company leases one facility in Providence, Rhode Island under an operating lease. The lease runs through January 15, 2013. Monthly rental payments are $500 per month. Future minimum lease payments under the terms of the lease agreement are $2,000.

10 -------------------------------------------------------------------------------- Table of Contents During the year ended December 31, 2011, we borrowed $525,000 in various installments from an officer of the Company. The related notes payable are unsecured, non-interest bearing and are due upon demand. On October 17, 2011, a significant shareholder, affiliated with a third officer of the Company sold 597,000 shares of the Company's common stock to this officer in exchange for the $525,000 of promissory notes from the Company, for an equivalent price of $0.88 per share. This significant shareholder transaction resulted in the Company recognizing $1,373,460 of share-based compensation expense, based upon the price at which common shares were issued for cash at that same date of $3.18 per share. The Company entered into an agreement with this same significant shareholder on October 17, 2011 such that, at such time as the Company is financially able to do so and at the reasonable discretion of the chief executive officer of the Company, but no earlier than November 18, 2011, the notes payable held by the significant shareholder would be extinguished in full by the payment of $262,500 in cash and the issuance of 85,548 shares common stock at a price of $3.18 per share.

On September 29, 2011, Cogility exchanged $845,000 of notes payable to Acquired Sales and $10,534 of related accrued interest for $448,000 of notes payable to related parties and $520,000 of notes payable to third parties. The transaction was evaluated to determine whether it qualified as an extinguishment of debt under current accounting guidance. Under that guidance, an exchange of debt instruments with substantially different terms is a debt extinguishment. Debt is deemed to have substantially different terms if the present value of the cash flows under the terms of the new debt is a least 10% different from the present value of the remaining cash flows under the terms of the original debt instruments. The present value of the cash flows did not change by 10%; therefore, the new debt was not substantially different from the original debt and the transaction was recognized as an exchange of debt rather than an extinguishment of debt.

The new debt was recorded at the carrying amount of original debt and accrued interest on the date of the exchange of $855,534 by adjusting the effective interest rate applied to the future payments due under the terms of the notes payable and, as a result, no gain or loss was recognized on the exchange of the liabilities. The resulting discounts and premiums are being amortized over the term of the new notes payable. At September 30, 2012, the carrying amount of the notes payable to related parties was $340,745, net of $34,255 of unamortized discounts and premiums, and the carrying amount of the notes payable to third parties was $475,468, net of $44,532 of unamortized discount.

The Company has borrowed cash from a lending company. At March 31, 2012, notes payable to the lender totaled $130,070, are unsecured, non-interest bearing and due on demand. The Company has not imputed interest on the loans as such imputed interest would not have been material to the accompanying financial statements.

The Company entered into an agreement with a consultant on February 18, 2011 whereby the Company has agreed to pay the consultant a fee based on net revenue received from a potential new software product. The fee would be equal to 5% of the net revenue received, after deducting software licensing and equipment costs from third parties, from two potential contracts and, for a period of five years, any subsequent revenue from reselling the work product that may result from providing software and services under either of the two potential contracts.

On June 13, 2011, a key executive resigned his position and entered into a severance agreement with the Company. On September 16, 2010, the Company had signed a letter agreeing to pay the former executive officer $47,000 in one-time commissions, with payment deferred until 30 days after the closing of a private placement of common stock or debt convertible into common stock in the total amount of at least $2,000,000. Under the severance agreement the former executive officer will receive a one-time bonus of $35,000 and deferred compensation of $18,432 payable upon the completion of a private placement of common stock or debt convertible into common stock in the total amount of at least $2,000,000. The former executive officer was also to be paid additional deferred compensation of $9,662 by September 30, 2011, but this amount was paid on November 3, 2011. In addition, the severance agreement modified the terms of stock options held by the former executive officer for the purchase 12,578 common shares which expired on June 14, 2012. Stock options for the purchase of 25,157 common shares were forfeited under the agreement.

On June 24, 2011 an employee resigned and entered into a severance agreement with the Company. Under the severance agreement, payment of $8,224 of vacation pay was deferred and to be paid the earlier of the completion of a $2,000,000 private placement offering or September 23, 2011. The amount has not yet been paid. In addition, the severance agreement modified the terms of stock options held by the former employee for the purchase of 25,094 common shares which expired June 24, 2012. Stock options for the purchase of 12,641 common shares were forfeited under the terms of the agreement.

11 -------------------------------------------------------------------------------- Table of Contents In addition, the severance agreement modified the terms of stock options held by the former employee for the purchase of 25,094 common shares which expired June 24, 2012. Stock options for the purchase of 12,641 common shares were forfeited under the terms of the agreement.

During the nine months ended September 30, 2012, the Company borrowed $737,000 in various installments from parties related to the Company. The notes bear interest at 6% per annum and are due upon demand. The notes payable have attached warrants to purchase 293,000 shares of common stock with an exercise prices ranging from $2.00 to $3.25 per share which expire five years from their respective loan date.

Off Balance Sheet Arrangements - We have no off-balance sheet arrangements.

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